VideoRoyal 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.
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