Accounting problems at embattled U.S. Foodservice surfaced last month despite strict controls that were "examined regularly" and had never shown any weaknesses, a company official said yesterday.
The primary allegation against the Columbia food distributor - that it improperly recorded price discounts as revenue - would violate a clear and long-standing company accounting policy, the source said.
In the first interviews with a U.S. Foodservice official since Feb. 24, when its Dutch parent Royal Ahold NV disclosed bookkeeping troubles at the Maryland unit, the official sought yesterday to reassure customers and employees that business is continuing and the company will survive its current plight.
While demanding anonymity and offering few new details of the company's accounting irregularities, the official said that leaders of U.S. Foodservice were surprised by the discoveries.
"This was an area that was under regular accounting scrutiny, by our accounting staff, by Ahold's accounting staff and by outside auditors," he said.
"Controls will not stop a determined party from doing something incorrect," the official added. "Controls will only catch them."
Royal Ahold disclosed last month that it overstated profit by $500 million or more in 2001 and 2002 and blamed accounting irregularities at U.S. Foodservice.
Two high-level executives of the Columbia distributor have been suspended, and the company's books are being investigated by the Justice Department, the Securities and Exchange Commission, Dutch regulators and dozens of auditors from Royal Ahold.
The parent company, whose top two executives resigned because of the crisis, also said it is investigating possible problems at subsidiaries in South America and Europe.
The issue at U.S. Foodservice involves how the company accounted for "promotional allowances" that it gets from vendors - volume discounts, mostly, that are common marketing incentives in the food service industry.
Some industry watchers suspect that the company improperly recorded discounts as revenue. One former finance officer with a predecessor company, David F. McAnally, said he resigned in 1997 over concerns about such accounting practices.
The company official said yesterday that U.S. Foodservice's formal policy prohibits such accounting and calls for recognizing manufacturers' rebates or discounts only when the products associated with them are sold to customers, such as restaurants, hospitals, schools and hotels.
Internal and external auditors for both U.S. Foodservice and Royal Ahold have scrutinized the company's accounting of vendor rebates over the years, and always - until the most recent audit - found it to comply with the official policy, he said.
"We all believed that the policy and procedures held up, and our beliefs turned out to be incorrect," said Robert Gillison, a U.S. Foodservice vice president and treasurer. Now, he said, "It's up to the investigators to tell us what happened."
The company source would not say how James L. Miller, U.S. Foodservice's chief executive officer, learned of the accounting scandal, but said Miller felt "angry and disappointed" and that "people let him down."
When asked how closely Miller monitored the vendor allowance programs, the source said that Miller works with the finance team to negotiate contracts and to make sure policies are carried out.
But "a CEO is not in there making general ledger entries," the source said.
The audit committee of Royal Ahold's supervisory board has sent dozen of forensic accountants to U.S. Foodservice's headquarters to examine documents and accounting records. Gillison would not characterize the scope or expected duration of the investigation.
"We're doing everything we can to cooperate," Gillison said. "We're an open book to them."
The accounting irregularities surfaced when Royal Ahold's external auditor was completing a review of finances from the last three months of 2002.
Industry sources and published reports have since revealed that during those months U.S. Foodservice ordered an unusually high volume of goods.
The company official did not dispute those claims yesterday, saying that U.S. Foodservice often buys more products at the end of a quarter or fiscal year, when vendors typically offer better discounts.
The source also did not dispute reports that U.S. Foodservice has grown increasingly aggressive in its efforts to extract rebates and discounts from its suppliers, calling it part of the company's strategy to build market share and use that leverage to boost profit.
"We're comfortable with going to vendors and saying, `We buy a ton of product from you. Make sure it's fruitful for both of us,'" he said.
The source also claimed that the accounting troubles have not had a measurable effect on U.S. Foodservice's business. "We're pleased with the sales trends and we continue to aggressively go after new business," he said.
Industry observers were not surprised to learn that company officials were speaking out about the company's accounting troubles, even as they face lawsuits and federal investigations.
When a financial scandal makes headlines, company officials often are under pressure to reassure the public before key vendors and customers panic and begin talking to the competition, one analyst said.