Kraft Heinz has agreed to pay $62 million to settle charges that its procurement division improperly managed expenses to deliver unrealistic cost savings and inflate profits.
The U.S. Securities and Exchange Commission said the alleged accounting fraud began after the $49 billion merger that formed Kraft Heinz in 2015 and continued until 2018. The fraud resulted in nearly 300 misleading transactions that, if they had been recorded properly, would have added $50 million to the company’s cost of goods sold during that time.
As part of the scheme, “supplier contracts that made it appear as if expense savings were provided in exchange for past or same-year events performed by KHC [Kraft Heinz Co.], when, in reality, they were upfront payments in exchange for a future benefit from KHC, in order to improperly recognize costs savings prematurely,” the SEC said in an administrative order.
To settle the case, Kraft Heinz agreed to pay a penalty of $62 million while former Chief Operating Officer Eduardo Pelleissone and former Chief Procurement Officer Klaus Hofmann will pay fines of $300,000 and $100,000, respectively.
“The violations harmed investors who ultimately bore the costs and burdens of a restatement and delayed financial reporting,” Anita Bandy, associate director of the SEC’s division of enforcement, said in a news release.
After the Kraft Heinz merger, management promised an aggressive push to reduce expenses. “The cost-saving strategy, including its impact on costs of goods sold, was widely covered by analysts at the time,” the SEC noted.
But after the company “encountered significant headwinds in its effort to meet annual budget and savings targets,” the commission said, Pelleissone “failed to adjust expense reduction expectations for the procurement division, creating a high-pressure environment focused on obtaining same-year cost savings.”
Procurement employees negotiated agreements with numerous suppliers to obtain upfront cash payments and discounts, in exchange for future commitments to be undertaken by Kraft Heinz. Under accounting rules, the company should have recognized the savings over the period of time that it performed the commitments but instead the procurement staff allegedly booked them as immediate, same-year savings.
“The misconduct resulted in KHC reporting inflated [EBIDTA], a key performance metric for investors,” the SEC said.