Royal Ahold NV said yesterday that U.S. authorities are investigating the accounting irregularities at Columbia-based U.S. Foodservice that caused the Dutch food retailing giant to overstate profits by at least $500 million.
The U.S. Securities and Exchange Commission and the U.S. attorney's office in Manhattan have launched probes in the wake of Monday's disclosure of the accounting scandal, which sent Ahold shares tumbling yesterday for the third straight day.
Ahold's U.S. shares fell 33 cents, or 9.6 percent, to $3.11 on the New York Stock Exchange yesterday, after sinking 63 percent Monday.
The world's third-largest retailer and owner of Giant Food Inc. of Landover is cooperating with investigators, said Annemiek Louwers, an Ahold spokeswoman.
"I cannot give any details," Louwers said. But, she said, "We want to get to the bottom of this."
An SEC spokesman said he could neither confirm nor deny an investigation. The U.S. attorney's office did not return phone calls.
Federal investigations are expected to focus on specific contracts and deals that U.S. Foodservice has with vendors, in which the vendors offer monetary incentives or discounts in exchange for the food distributor's promise to sell a high volume of products.
The SEC will look at how U.S. Foodservice booked those "promotional allowances."
"A typical promotional allowance might give them a 20 percent discount if they achieve a certain volume," said Edward Ketz, an accounting professor at Pennsylvania State University who is writing a book on accounting scandals. "It would be perfectly fine for the accountant to recognize that, if he thinks that volume will be hit. The evidence will focus in on whether that volume is a realistic target."
But investigators could determine fraud based on whether the company booked the promotional allowances as income before receiving them or in cases where they never received them.
"Was it an honest error [in miscalculating future sales of the vendor's products], or were you trying to mislead investors?" said John McAllister, chairman of the accounting department at Kennesaw State University in Atlanta. "If it was misleading, they would go the fraud route on it. It becomes a timing issue -- if it is a second-quarter item and they're putting it into the first quarter to hit earnings estimates."
Analysts have said U.S. Foodservice was under pressure to reduce debt and maximize earnings.
Yesterday, Ahold reiterated that James Miller would stay on as chief executive officer of U.S. Foodservice, which distributes food and supplies to hospitals, schools, hotels and restaurants.
But sources close to U.S. Foodservice said that Miller's continued tenure could be short-lived, and that he is expected to step down in a matter of days. Top executives at Ahold, who some sources believe found out about the accounting irregularities just three to four weeks ago, had no one to immediately move into Miller's job and agreed to have him lead the company during a transition period, sources said.
Ahold would give no further details on the suspensions of a small number of executives in U.S. Foodservice's sales, marketing and procurement division. Miller did not return phone calls yesterday. In a letter he distributed to the Columbia company's employees, Miller said he has the support of Henny de Ruiter, chairman of Ahold's supervisory board and interim Ahold CEO.
On Monday, Ahold said it had overstated earnings in the past two years by at least $500 million, prompting the immediate resignations of Chief Executive Officer Cees van der Hoeven and Chief Financial Officer Michiel Meurs. Moody's Investors Service cut its rating on Ahold's senior unsecured debt to junk Tuesday, a day after Standard & Poor's reduced the company's long-term-debt rating to non-investment grade.
Accounting scandals have become increasingly common over the past two years as "managers view accounting as a PR technique for making themselves look good, rather than as a vehicle to convey information," Penn State's Ketz said. "The biggest thing we've learned from the past two years is the corporate governance mechanisms aren't working. It should involve the directors playing a key role to challenge what managers are doing."