Foodservice bookkeeping doubted in '97

Ex-CFO says he quit after warning was rejected

Values overstated `by an awful lot'

McAnally tells of scenario before JP Foodservice deal

March 11, 2003|By Robert Little | Robert Little,SUN STAFF

A former executive with a predecessor of U.S. Foodservice, the embattled Columbia food distributor whose accounting practices are under federal investigation, said yesterday that the company was using controversial bookkeeping methods at least six years ago - three years earlier than previously disclosed - and perhaps since the company was founded in 1989.

David F. McAnally, the former chief financial officer of Rykoff-Sexton Inc., said he alerted his board of directors to the "smoke and mirrors approach" when his company proposed to merge with JP Foodservice Inc. in 1997, a deal that would later create the modern U.S. Foodservice.

He said he resigned when the board rejected his concerns and followed through with the merger, siding with James Miller, the JP executive who is now chief executive officer of U.S. Foodservice.

"It was my belief, as CFO, that their approach to booking income was overstating their values by an awful lot of money," said McAnally, who now runs a small energy company in Pennsylvania. He could not recall a dollar figure, but said he believed that the company's books were "off by hundreds of millions of dollars of value" at the time.

"I was not at all surprised when I saw that it had all come back to haunt them," he said.

U.S. Foodservice's parent company, the Dutch grocery giant Royal Ahold NV, disclosed last month that accounting troubles at its Maryland food service subsidiary caused it to overstate earnings over the past three years by at least $500 million. Federal prosecutors and the U.S. Securities and Exchange Commission are investigating the case, as are government agencies in the Netherlands. The top two executives at Royal Ahold resigned when the scandal broke, and two executives at U.S. Foodservice have been suspended.

The accounting irregularities under investigation involve the way that U.S. Foodservice books rebates and discounts it receives from food vendors, typically in the form of volume discounts or other premiums. The company is thought to have recorded "promotional allowances" before it sold the products they were tied to, a method that could artificially inflate the company's revenue.

McAnally said he encountered similar accounting tactics when Rykoff-Sexton Inc. was considering its merger with JP Foodservice, a Columbia-based company that Miller founded in 1989. The two companies merged in 1997 to create the nation's second-largest food distributor and later took on the name U.S. Foodservice, which had been a Rykoff-Sexton subsidiary.

According to McAnally, JP Foodservice had long been recording some promotional discounts before it sold the related products, and proposed to continue that practice after the merger. McAnally said he objected and recommended that his board of directors reject the deal.

"I believed very strongly that if you were going to realize income you needed to sell the product first," McAnally said. "Jim Miller's approach was to book it based on a history of being able to push those volumes through the distribution cycle. It was an approach that, in my opinion, was destined for failure."

A spokesman for U.S. Foodservice would not comment about McAnally's assertions, except to point out that the merger was approved unanimously by the company's directors.

The company's 1999 annual report states simply: "Allowances and credits received from suppliers in connection with the company's volume purchases are recognized upon the sale of the product, while allowances and credits associated with the company's merchandising activities are recognized as the services are performed."

McAnally's disclosure follows reports that another financial officer at U.S. Foodservice resigned in 2001 because of concerns about the company's bookkeeping. The Financial Times of London reported yesterday that then-CFO Ernie Smith left the company after only three months and reported his concerns to officials with the parent company in Holland. Smith could not be reached for comment.

If the accounting philosophy described by McAnally is the same method that caused the current crisis at U.S. Foodservice, then it would seem to contradict a recent statement from Miller suggesting that he was unaware of the bookkeeping troubles.

While not being specific, Miller wrote in a letter to employees and customers last week that "unfortunately, there may be some validity to some of the reports" characterizing the company's accounting irregularities.

"To my utter surprise and dismay, it has been reported to me that a few trusted employees worked outside our accepted accounting procedures and let our company down. The individuals in question have been suspended from the company pending the outcome of ongoing investigations," Miller said in the letter.

Mark Kaiser, one of the suspended U.S. Foodservice executives, was also an executive of JP Foodservice and worked with Miller to close the merger with Rykoff-Sexton.

Staff writers Lorraine Mirabella and Paul Adams contributed to this article.

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