Monday, December 17, 2018
'Royal AholdÃ¢â¬â¢s Case Write Up\r'
'Executive Summary The national discusses the violet AholdÃ¢â¬â¢s the major dismantlets that led to the death of a great European mark. The case presents umpteen of the key exposes in the atomic number 18as of leadership, come inline, inspect and bill malingerer that resulted in their disaster. The case identifies the problems made by the charge in selecting the unseasonable harvest-tide schema and fillip plan that encouraged unethical behaviour from the elderberry bush caution. The events presented touch and eminentlight watchfulness and presidency fares, which are so important in managing global companies.After analytic thinking of the cases and financial statements, I afford come with questions and concerns on the focusing and financial statements that could shit caught this earlier on. Questions to be asked and process of approving budgets, corporate strategy, risk rules would form move ond concerns on the management style. Some of the differe nt recommended legal actions for venire and its different perpetproportionns would fuck off discouraged the improper management practices. Some of these questions capacity remove surfaced received issues and / or encouraged the decently practice.I found various accounting standards, ch all(prenominal)enges of global scrutinise process; in this case it was led by Deliotte. The chief operating officerÃ¢â¬â¢s and leadership maturation strategy was the reward and intelligence was improper. The number of acquisitions made during the 90s and continuous pressure was throw on all subsidiaries to grow the sales by 15% were mischievously decisions. This alone led to m approximately(prenominal) other problems within the ac fellowship. The CEOÃ¢â¬â¢s growth strategy and desire to quickly grow the company put immense pressure on all other companies and fourth-year management to slightlyhow outfit the CEOÃ¢â¬â¢s expectation.It all resulted into duplicityulent activitie s and eventually disaster of great company. I recommend adopting changes to inducement plans, non-financial factors be break dance of success criteria. In quantity financial success, working capital ratio, inventory days, due and payable targets should be part of incentives. Above all, I recommend changes to the get on citizens deputations and ensuring their work is independent was withal important, i. e. harbour stock commissioning, establishment of HR committal to raise issues and improve the all overall organisation civilisation. The case similarly highlights the issue of multiple accounting standards be dependable in very coun move.A standard corporate liberal accounting standard in purplish Ahold essential have been used. Both outside and natural visitors essential(prenominal) have report ed numbers in a consistent sexual climax. I recommend that scrutiniseors had organise reporting to board and should have empowe wild and accomplished to look f or documentation and management organizes in their scrutinise process. Had they dig deep on all areas of concerns of worldly significance they might have found face letters. I have as well highlighted other recommendations including the turn backs in the accounting standards and in preparing financial papers.Incentive plans and corporate strategy be realistic to avoid un valued behaviors. spectre of the exit management including the boardÃ¢â¬â¢s, assignment of responsibilities be fairly stated and periodically measured. Student id: 250712690 1 Management Accounting Exam Problem realization: The case depicts a nonher case of fail of nerve and worry ethical motive. This appears to be a fake and non just accounting mistakes. By 2003, the time of the case, Enron, WorldCom and a couple of(prenominal) others had already identified the need of business ethics and corporate formation. empurpled Ahold series of events happened mainly due to edacity and unethical behaviour simply what really downstairslies is the butt setting, growth strategy and, rewards actualization criteria set by management. The case also presents issues of be accounting, in cost of, when to apply the manufacturing rebates. Consolidation of subsidiaries and joint ventures also play a role in this machination. It also grounds bad governance, blots in external size up, failure of internal take stock functions and to some degree their competency. Leadership strategy: purple AholdÃ¢â¬â¢s CEOÃ¢â¬â¢s strategy of 15% growth year-over-year was very hostile.The reward and recognition structure around the sales number was improper as it led management of all subsidiaries and other business units to increase the receipts and see the targets. CEO kept communicating to board and shareholders the expectation around the sales strategy and likelihood of meeting these targets. Consequently, it created a nuance whitherby precedential management were under pressure to meet t he sales objective. The senior management and head of subsidiaries must have felt that missing the sales targets is not even an option. Accounting Fraud: The case presents few big issues of accounting.Firstly, the issue is of the incorrect accounting word of manufacturing rebates and promotional allowances. My eyeshot is that rebates cannot pass the cost of ripe(p)s unless in that location is a certainty of getting the rebates. If the rebates are mutable they cannot decrease the cost of goods incorrectly. From the case, it appears that management ordered to a greater extent(prenominal) quantity of goods then they could have sold. They booked the rebates at time of goods received and decrease the cost of goods prematurely. (Assumption: It is not very clear from the case, if these rebates were booked as income or adjusted against the cost of goods i. . decrease in cost of item. I have assumed that gallant Ahold accountants decreased the costs (prematurely as per above paragr aph). If these were booked as income, then it is even a bigger fraud and not an accounting error) Second accounting fraud problem is the accountants preparation of Royal AholdÃ¢â¬â¢s set up company financial statements. They consolidated the financial statements including some of the joint ventures when Royal didnÃ¢â¬â¢t even had pick up over them. Royal Ahold did not own more than 50% of these amountt Ventures and did not have the control of the decision qualification.They created duplicitous paper work to show they had control on these join venture companies. This is a pure fraud as they created contracts to satisfy auditors and try to hide the real facts. Audit: Both external auditors and internal auditors (and audit delegacy) failed to detect any of the accounting issues. It could have been missed as accounting standards in numerous countries is different. External auditors, even though they whitethorn all be of Deloite, of one country but audits that country state ments, so they may not be familiar what might be happening in other parts of the company.However, the Royal Ahold parent company auditors are responsible to have an oversight of companywide audit and should be held responsible for over -looking these fraudulent transactions. intimate audit and boardÃ¢â¬â¢s audit committee failed to detect any of the misrepresentation either. On upside of that in Netherlands there were two boards (Governing Board and supervisory Board) and both boards werenÃ¢â¬â¢t able to detect or raise red flag on any of these problems and misrepresentations. Management having two sets of paper work with JV ( phrase Ventures) without coming under the investigation shows incompetency of audit functions.Governance / Audit organize The counsel the governance and audit structure was laid out at Royal Ahold, there were five different committees and entities were responsible to look backward accounting and financial controls and practices that could have asked questions and raise concerns (red flags). They were: The governance board, supervisory board, the audit committee, internal audit department and the external auditors. Each should have independently reviewed management controls and financial statements and raise concerns and issues. Raising Red FlagsIn my opinion, the governance structure and audit committees and external auditors were sufficient luxuriant to handle or uncover such fraudulent activities had they been critical, created the aright controls, empowered the internal auditors and obviously asked the right questions while reviewing the financial statements and other management documentation. As part of board, I would have asked questions following questions, or have acted when seen abnormalities. This would have helped me in calling issues, concerns and in breeding red flags on the Royal Ahold 1999-2001 financial statements.Also some of them are related to mid 90Ã¢â¬â¢s management billet and strategy. Strategy and Growth feeler: The target of meeting 15% year-over-year in sales, specially in US in 2000-01 when economy was in recession should have alarmed the board and internal auditors. They should have investigated how the sales targets are being achieved. It is not easy to meet 15% sales in US food industries under this economic climate. This may have led the management behaviour in meeting the targets.As board atom, I would have asked CEO to explain the strategy of rewards and recognition, mainly on top line bonus as it is a unlawful choice. (I have personally worked at Compaq during 1999-2000 and have seen the issue of top line bonus and commission on sales. This led to CompaqÃ¢â¬â¢s continued crises and eventually it was bought by HP in 2003). I would tried to enamor the board and hence the CEO to consider a more comprehensive rewards strategy. From my experience bonus strategy plays a big role in company horticulture. The other important factor that develops the management atti tude is what CEO likes to hear.It seems Royal AholdÃ¢â¬â¢s CEO, Cees van der Hooven, wanted to hear from all his subsidiaries and mutual Ventures that sales targets are being met every quarter. I would have turn the management style and company culture to be protected by changing (or diluting) this approach. CEOÃ¢â¬â¢s attitude and leadership style was one of the guide cause of Royal Ahold demise. His competitive acquisition approach would have resulted in integration issues within the company. As board member, I would have asked the management plans on integration and how culture of the organization would not be electronegatively impacted.I would have created the board HR committee to influence management not to allow the negative impacts on the organization culture, integration within the organization, rewards and recognition be such that it would not have allowed the culture to deteriorate. The cultural issues, integration issues and above all covetousness among the man agement team members was uncontrolled in Royal AholdÃ¢â¬â¢s accounting scandal. The growing number of acquisitions was super risky initiative; the corporate strategy was carrying high risks at all operational levels including controls, integration that may have led to frauds.Also, this had potential to be a reputation risk as well. In my opinion, board should not have approved such an aggressive corporate growth strategy. merge Statements Although Royal Ahold self-will is less than 50% in some Join venture companies, they showed controlling interests in some companies. To me an agreement paper presented by the management is not sufficient. I would have asked the significance of Royal AholdÃ¢â¬â¢s control and ask management which areas of articulate Venture management we have been making decisions on.If we are making decisions, even though we donÃ¢â¬â¢t own more than 50%, what are the risks associated with these decisions. As a board member, I would have understood how Roy al Ahold has influenced the Joint Venture management. I would have also asked audit committee to understand the management structure of Joint Ventures. Taking a step further, assuming that 20% share would have enforcen Royal Ahold right to appoint a board member on Joint VentureÃ¢â¬â¢s Board, I would have understood from the Joint Venture board member ( by dint of Royal Ahold appointed director) how the joint ventures decision making process really works.By asking such questions and efforts in trying to understand from the board and management of Joint ventures how the organization is actually structured and working. If Royal Ahold does not have a controlling authority on the acquired company, the company financial statements cannot be consolidated. RoyalÃ¢â¬â¢s accounting practice o f consolidation will first bump up the receipts numbers. This was purposely done to beef up the revenue figures. This may have resulted bigger bonus for the senior management. Also, the balance canvass would be more personable to the shareholders (and potential shareholders). To explain this here is simple fable:Parent Current Assets Assets integrality Assets Current Liabilities Liabilit ies Total Liabilities Shareholders Equity Debt to Equity Ratio Subsidiary Consolidated 3 7 10 1 3 4 4 10 14 4 1 5 3 7 0. 5 1. 5 3. 5 8. 5 3 2. 5 5. 5 2. 3 0. 6 1. 5 As illustrated in the hypothetical example above example, by consolidat ion the debt looks more attr combat-ready then it would have looked differently in the parent company. The debt to paleness shows debt-to-equity of ($1. 5:$1) when consolidated, and ($2. 3:$1) when not consolidated. Similarly, other financial ratios would have looked good with consolidation of financial statements.The consolidation resulted in wagerer financial statements; hence Royal Ahold used this approach. In actual, this should not have used consolidated method. As per the accounting text, Parent when owns an investee companyÃ¢â¬â¢s 20%-50% sh ould use the equity method of accounting. The equity method would have mainly impacted the earnings on the Income statements. The net income, however, would result the same earnings without changing the revenue numbers. On the balance sheet side, the equity method would but show true Ã¢â¬Å"AssetsÃ¢â¬Â number, as per the investments made in the JV by Royal Ahold. The financial ratios (e. . debt to equity or quick ratio etc. ) will not be as appealing as it started to sound with consolidated statement. jeopardy Controls: As board member, I would have influenced the broad(a) board not to approve the corporate strategy as a budget was too aggressive and surrealistic. As pointed out above, realistic targets are extremely important. If strategy is too aggressive and corporate culture is to share good news with the CEO the unrealistic budgets targets may lead to malpractice and improper (fraudulent) activities. In my opinion it is supervisory board obligation to approve only realis tic targets.The corporate strategy in the growth years of mid Ã¢â¬Ë90s was too aggressive. This has done part of the damage in the culture and mind-set of the senior management that 15% growth is not unrealistic and has created an attitude to meet these targets in any way possible. This encouraged the wrong doings and possible frauds that started to take place in 1999-2001. Although it is not very clear from the case, were there any wrong doing (or activities) in 199798, but in the hind-sight, it appears that some of the issues must have started or existed in that time as well.The board and senior management should actively work on identifying risks to the organization and work on strategies that mitigates the risks. A key here is to have a formal risk opinion process on an yearbook basis. The assessment is under supervision of the board and results are reviewed by the board. stock 2001 balance sheet shows 20% rise in inventory, I would have raises some concerns that might have uncovered the management improper decision to order such high quantity of stocks to get the manufacturing rebates. Accounts ReceivableIn 2001, accounts due increased by Euros 605M i. e. 21. 2%. I would have asked questions around the assumptions and likelihood receiving the Account Receivable. More importantly, who owes this receivable to Royal Ahold. This may have been due to the manufacturing rebates include in the accounts receivable. If so, it would have led to the whole issue of management aggressive behaviour on ordering stocks to get rebates. It might have opened up the entire incorrect accounting treatment of manufacturing allowances and rebates. full full general ReserveRoyal Ahold is showing consistently on their balance sheet a general reserve item that is over 5 to 6 Billion euros (approx). This appears to be high, I would have asked on what assumptions these provisions are made. It might have uncovered some of the assumptions that are being made by management. This general reserve is in addition to the 1. 5B euros in other provisions. This is should have been a red flag. Other Recommended Preventive Measures anyways the concerns and red flags mentioned above, I would have raised based on what I would have seen.I would have also taken following measures to prevent this from happening. Incentive (Bonus) Structure: The bonus structure cannot solely be based on financial goals. The bonus structure has to base on non-financial goals as well. Within financial goals all aspects to kept in mind when designing the appropriate incentive program. The increase in working capital (inventory, receivables, payables etc. ) is kept at nominal or in line with the net income. The increase or decrease in working capital beyond the realistic proportion to earnings should be discouraged through the incentive program as well.Audit Committee Structure: The case presents the audit committee and internal audit department weaknesses and signs of some of their ineff icient processes and competency issues. Besides reviewing the audit committee performance, supervise and control issues were also been found. I would have influence the audit committee to have a metrics of internal audit department. This may have encouraged more objectivity of audit functions and may have aligned management controls to the overall governance issues. It is the responsibility of audit committee that internal and external auditors have an open communication.Besides audit of the current financial statements, and review of controls and structures, the auditors must identify areas of improvement in controls and work on action plan in improving the organization controls and monitoring process. HR Committee As mentioned above, I would have asked board to create HR committee that takes an active role in setting the controls in the organization. The committee should take an active role in reviewing the annual compensation and objective setting. Committee should have taken an independent review of key hiring decisions and management capability on integration and organization culture.Some key decisions in this area should only made by committee after consulting with the management, audit and boardÃ¢â¬â¢s general direction. IT System: I would have asked internal audit committee to contain all IT systems are audited to ensure proper controls are in place. Usually, in fraud IT systems controls could have loop holes or management may have the ability to bypass some of the checks and balances and/ or segregation of duties. Consistency in financial Statements Royal Ahold had companies in four different continents and in many countries.Financial statements presentation and laws crossways the globe are not consistent. US GAPP, Netherlands GAAP, IFSA and others are not standard across all countries where the Royal Aholds companies are in operation. bit the fact makes a challenge for the board, it doesnÃ¢â¬â¢t give them an excuse of letting things slip. Th e board should have worked out with internal and external auditors in creating a minimum corporate standard across the group of companies. It is the flaw in governance and leadership to over-look this fundamental point.\r\n'