Royal Ahold’s Monday bombshell that it overstated earnings by $500 million has suddenly put Europe’s securities regulators and accounting profession on the defensive.
The timing of the Ahold scandal couldn’t be worse for standards setters on the continent. As CFO.com reported on Monday, the International Accounting Standards Board (IASB) has been gaining in sway recently with market regulators in scores of countries. Indeed, about 95 percent of respondents in a new global survey said their countries are adopting the IASB model for corporate accounting—and not the U.S. GAAP system espoused by the Financial Accounting Standards Board (FASB).
The Ahold fiasco, however, could put the brakes on this movement, with securities regulators now wondering whether the IASB model is any better than U.S. GAAP—a system that critics say led to Enron, WorldCom, and many of the other high-profile frauds in the United States in the past year or so.
In fact, European Union Internal Market commissioner Frits Bolkestein, who had already planned to make a speech to the European-American Business Council in Washington on Monday, seemed humbled when forced to address the Ahold situation.
“We are neither complacent nor arrogant enough to believe that they could not have happened in the EU,” he said, according to the Associated Press, quoting from a text released in Brussels.
And Julian Franks, a professor of finance at the London Business School and fellow at the European Corporate Governance Institute, said the fact that there have been fewer scandals in Europe does not mean Europe’s rules are “hugely better” than the United States’s, according to the wire service’s account.
“The only difference is our incentives for these things is probably less than in the United States,” said Franks, noting that the use of stock options is far less prevalent for European executives.
Except, it seems, at Royal Ahold. The AP quoted a spokesman for the Dutch Foundation for the Investigation of Corporate Information in Amsterdam saying: “Ahold is also one of the first big [Dutch] companies with big options schemes for managers…. They have an incentive to make nice figures.”
Management at Ahold, the world’s third-largest grocer and owner of U.S. giant Stop and Shop, said earnings for the past two years were overstated by $500 million at its U.S. Foodservice division, whose customers include restaurants, schools, and hotels. Ahold indicated that local managers booked much higher promotional allowances—provided by suppliers to promote their goods—than the company actually received in payments.
The company also announced that chief executive Cees van der Hoeven and chief financial officer Michael Meurs would leave the company as soon as replacements are appointed. (To read more about Meurs’s resignation, click here.)
Ahold further said forensic accountants are investigating the legality of certain transactions and the accounting treatment at its Argentine subsidiary, Disco. “The investigation to date has uncovered certain transactions that are questionable,” the company added.
The announcement spooked stock markets around the world, including those in the United States, although war worries also played a role in Monday’s sell-off. Ahold’s shares plunged by more than two-thirds on Monday.
Interestingly, at the time of Ahold’s announcement, only 9 of 48 analysts covering the company were recommending that shareholders reduce holdings as of Friday, according to Bloomberg.
After the bombshell, however, Standard & Poor’s cut Ahold’s long-term corporate credit rating to BB-plus, which is considered “junk.”
According to ft.com, problems with booking vendor allowances can be hard to detect. But in Ahold’s case, they appear to have been detected by Deloitte & Touche, Ahold’s auditor for more than 15 years.
A representative from the Big Four accounting firm told ft.com: “We stand by our work. This exemplifies the role of the independent auditor. Deloitte discovered significant financial irregularities and alerted management.”
Deloitte reportedly said it identified the problems during the 2002 audit, and passed details to Ahold’s board last week.
Asked why irregularities were not identified during the 2001 audit, a Deloitte spokesman told the Web site: “It now appears there may have been irregularities in U.S. Foodservice’s accounts for 2001 which were not apparent to us as auditors at the time. These are now being investigated.”
Bear in mind that in November, an EU committee came out with about 20 new corporate-governance proposals. The committee did not recommend one single corporate-governance code to replace the 40 or so codes that govern individual EU nations, however.
In his speech, Bolkestein reportedly said the EU was “close” to issuing proposals. He recently said that self-regulation, “combined with disclosure and transparency obligations should be the guiding principle for any initiative in corporate governance,” according to the AP.
But he also suggested a “limited number of made-to-measure rules might…be necessary, so markets can play their disciplining role in an efficient way.”
“We need to converge on common principles and understandings,” he reportedly said in his Monday speech. “Not an identical approach but understanding where different approaches can be consistent.”
The next step for Ahold could be an audience with the Securities and Exchange Commission. “If any company makes a restatement of earnings, the Commission staff is going to look at it,” Herb Perone, a commission spokesman, told Reuters.
He wouldn’t come out and say whether Ahold would be specifically targeted by the SEC. But Perone told Reuters that an issuer of securities “listed in the U.S. falls under the jurisdiction of the SEC.”
Joseph Carcello, a professor of accounting at the University of Tennessee, told the wire service: “Chances are somewhere between very good and overwhelming that the SEC will take a good look at the Ahold accounting issue.”
This is a long way from being over.
Promotion Time for Two CFOs
Continuing a recent trend, the chief financial officers at two well-known companies have been promoted to more important positions.
Disk-drive maker Maxtor Corp. named Paul Tufano as president and chief executive officer. He will also join the board of directors.
Tufano succeeds Michael Cannon, who resigned in January to become chief executive of Solectron Corp., a contract manufacturer.
Tufano joined Maxtor in 1996 as chief financial officer. Since 2001, he has also served as the company’s chief operating officer, responsible for worldwide operations, including manufacturing.
Prior to joining Maxtor, Tufano, who has an economics degree from St. John’s University and an MBA from Columbia University, spent 17 years at IBM in a variety of management positions, primarily in the storage-systems division.
Meanwhile, Cendant Corp. said CFO Kevin Sheehan will take on the additional responsibility of heading up the company’s vehicle and financial-services divisions, succeeding John W. Chidsey, who resigned as chairman and CEO to pursue opportunities outside of Cendant.
The vehicle-services division includes the Cendant car rental group (Avis and Budget), PHH Arval, and Wright Express.
“Considering Kevin’s previous role as president of Avis, he is the perfect choice to manage Cendant’s vehicle services division and spearhead the integration of Budget within the company’s newly formed car rental group,” said Cendant’s chairman, president, and CEO, Henry R. Silverman, in a statement.
Dell Opposes SEC Proposal
Dell Computer Corp. fired off a letter to the SEC opposing parts of a proposed rule that would set limits on the manner, timing, price, and volume conditions for corporate stock buybacks.
Dell management reportedly said in a February 18 letter to the SEC that, although it supports more disclosure on share buybacks, it believes the rule could create confusion.
Among the SEC’s proposals, companies would be required to disclose share buybacks more frequently, perhaps within 10 days of the transaction or on a monthly basis. Another proposal would require companies to reveal the identity of the broker-dealers that the company uses to make purchases.
Dell reportedly asserted monthly or daily reporting of share repurchase activity “would not provide meaningful information to investors.”
The letter, which was sent by Dell’s accountant, also said the company’s management believes that the disclosure of share transactions that exceed a certain size would provide incomplete and potentially misleading information, according to published accounts.
Dell discloses its share repurchase activity on a quarterly basis.
The computer company’s management also insisted that identifying the brokers used for a share repurchase program is “not meaningful” to investors and could create an “undue burden” on the companies that issue stock.
Emerson Electric is one of a number of other companies that have raised similar concerns, according to Reuters.
The SEC’s comment period ended on February 18.
- Chief information officers anticipate a slowdown in the hiring of information technology professionals in the second quarter of 2003, according to the Robert Half Technology IT Hiring Index.
Nine percent of executives surveyed plan to expand their IT departments in the coming months, and 5 percent anticipate staff cutbacks. The net 4 percent hiring increase compares with a net 8 percent increase forecast last quarter.
The majority of executives—86 percent—plan no change in hiring activity. The poll includes responses from more than 1,400 CIOs from U.S. companies with 100 or more employees.
- Several middle-level managers at Qwest Communications International Inc. are expected to be indicted as early as Tuesday for their role in the company’s accounting problems, according to Reuters, citing sources familiar with the situation.
Fewer than five mid-level Qwest managers are expected to face indictment this week, said the wire service, citing one source familiar with the U.S. Attorney’s investigation, who spoke on condition of anonymity.
Qwest said in July that the U.S. Attorney’s office in Denver launched a criminal investigation of the company.
- SIRVA Inc., a Clayton, Dubilier & Rice portfolio company, has appointed Sprint Corp. CFO Robert J. Dellinger to its eight-member board of directors.