Royal Ahold on a fall from grace

Indignity: The once high-flying Dutch company, the parent of Giant Food, is under investigation and in trouble on two continents.

March 02, 2003|By THE ECONOMIST

IS AHOLD Dutch for Enron?"

That was the sardonic comment from one share dealer when, on Monday, Royal Ahold of the Netherlands, the world's third-largest grocer, acknowledged overstating its 2001 and 2002 profits by at least $500 million because some managers at an American offshoot, U.S. Foodservice, had been booking unearned revenues. Ahold also revealed that it had found possibly illegal transactions at an Argentine subsidiary. Furthermore, it has discovered that it does not control its Swedish subsidiary, which has until now been 100 percent consolidated in its accounts. Ahold is under investigation by the U.S. attorney's office in New York, the Securities and Exchange Commission and the Euronext stock exchange in Amsterdam.

(Ahold also owns Giant Food Inc. of Landover.)

In recent months, Ahold's shares have fallen sharply, apparently because of external worries about the reliability of its accounts and disappointment at missed profit targets. They took a further dive in response to last week's news, and are worth only a tenth of their value at the peak of Ahold's fortunes in mid-2001. The chief executive, Cees van der Hoeven, who took the retailer on a worldwide buying spree, from Chile to Thailand, running up net debts of around $14 billion, has resigned along with his chief financial officer, Michael Meurs.

Until now, Europe has not suffered accounting scandals on the scale of America's recent huge ones, such as the Enron and WorldCom cases. Where they have occurred, they have typically been at new, smallish companies, such as Comroad, a German navigation-technology company that was found to have invented 97 percent of its revenues in 2000. But Ahold is one of the Netherlands' most stately companies, founded in 1887. On its 100th anniversary in 1987, Queen Beatrix granted it permission to style itself "Royal Ahold."

Coming after the fraud discovered in July at ABB, a big and once-admired Swiss-Swedish engineering group, and the debt crisis at Vivendi, a giant French conglomerate, the Ahold scandal calls into question the belief among some continental Europeans that their style of corporate governance and ownership is somehow more trustworthy than le capitalisme sauvage, as practiced in America (and, to an extent, Britain).

Having a second, "supervisory" board to oversee the executive directors, as Dutch and German companies do, appears not to have helped much in Ahold's case.

The supervisors seem to have been remarkably slow to act, given that stock-market analysts and the financial press have been questioning the firm's accounting standards for months, especially after it revealed, last April, that its profits for 2001 would be only $129 million under American accounting rules, compared with $1.07 billion under Dutch rules.

The problems at Ahold have not only highlighted the vulnerability of European companies to accounting scandals, but have pointed up a contrast in the approach taken by American and European regulators. The American investigations center on whether promotional rebates from suppliers were booked fraudulently to meet aggressive revenue targets. In contrast, no Dutch authority is looking at the question of possible fraud or misleading accounting at Ahold: The economics ministry described the affair as "an internal business matter." The investigation by the Dutch stock exchange is into alleged insider trading, not fraud.

Some observers believe that the problems have only now come to light because of tough requirements under America's new Sarbanes-Oxley act on corporate governance. This piece of legislation, passed last year in the wake of the Enron scandal, demands that senior executives of companies listed in the United States, as Ahold is, personally sign off on the veracity of their accounts.

They face severe penalties if they deliberately mislead shareholders.

Among the reasons for the huge discrepancy between Dutch and American accounting profits last year was that Dutch rules allowed Ahold to treat one-off gains from selling property as operating profits. And it was not the only reason for analysts to question the figures Ahold's managers were publishing. An American accounting firm, the Centre for Financial Research and Analysis, published several critical reports last year questioning Ahold's operating performance, looking, in particular, at how a chunk of its earnings seemed to have come from changes in accounting methods.

Effect of revelation

Such measures seemed to involve merely stretching the rules. But last week's revelation, that U.S. Foodservice had been booking promotional payments from its suppliers before it had received them, appears to have stretched them beyond the breaking point.

Overall then, Ahold is not much of an example of the supposed superiority of Europe's "principles-based" accounting regimes over America's "rules-based" system.

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