Europe’s Enron: Royal Ahold, N.V.users.metropolia.fi/~minnak/ipw/Monika...

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ISSUES IN ACCOUNTING EDUCATIONVol. 22, No. 4November 2007pp. 641–660

Europe’s Enron: Royal Ahold, N.V.Michael C. Knapp and Carol A. Knapp

ABSTRACT: Royal Ahold, N.V., is a large multinational company based in The Neth-erlands that was founded in 1887 by Albert Heijn. Three generations of the Heijn familyoversaw the company’s retail grocery business. In 1989, the company hired a profes-sional management team. The new management team expanded Royal Ahold’s oper-ations by purchasing grocery chains around the globe, resulting in the company be-coming the third largest food retailer in the world. In 2000, the company diversified intothe wholesaling segment of the huge food industry when it purchased U.S. Foodser-vice, a large food wholesaler based in Columbia, Maryland.

Royal Ahold’s professional management team established aggressive earnings andrevenue goals for the company each year and pressured their subordinates to achievethose goals. An incentive compensation plan awarded large year-end bonuses to man-agers of operating units that met or surpassed their financial goals. Royal Ahold’sdecentralized operations, when coupled with the strong incentives to achieve un-realistic earnings and revenue goals, created an environment in which fraud oftenflourishes.

In early 2003, Royal Ahold’s independent auditors suspended their fiscal 2002audit of the company when they discovered numerous potential irregularities in thecompany’s accounting records. Subsequent investigations documented that the com-pany had improperly included the operating results of foreign joint ventures in its con-solidated financial statements, had accounted improperly for initial acquisition costsrelated to several of those joint ventures, and had materially overstated ‘‘promotionalallowances’’ due from company vendors. The disclosure of the massive accountingfraud resulted in criminal and civil lawsuits being filed against the company and its topexecutives in both Europe and the United States.

This case examines accounting, auditing, and control issues pertinent to multi-national companies. In addition, the case examines recent controversies arising be-tween and among international regulatory agencies and rule-making bodies within theaccounting and auditing disciplines. Finally, the case illustrates important risk factorscommonly associated with financial statement fraud.

Keywords: international accounting standards; financial statement fraud; joint ventureaccounting; ethics; auditing.

INTRODUCTION

In 1887, a young Dutchman, Albert Heijn, entered the business world by purchasing asmall grocery store from his father.1 The store was located in Oostzaan, a village onthe Dutch peninsula known as North Holland, also one of The Netherlands’ 12

Michael C. Knapp is a Professor and Carol A. Knapp is an Assistant Professor, both atthe University of Oklahoma.1 We thank Glen McLaughlin for his generous and continuing support of efforts to develop instructional cases

that highlight important ethical issues for use in accounting and auditing courses.

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Issues in Accounting Education, November 2007

provinces. Unlike his father, who was content to own and operate a small business, Alberthad dreams of becoming an entrepreneur on a much larger scale. Within ten years, thefrugal and hard-working Heijn owned two dozen grocery stores scattered throughout thesmall country.

A key to the early success of Heijn’s retail grocery chain was that he designed eachof his new stores to meet the specific interests and needs of the community in which it waslocated. For example, the merchandise stocked by Heijn stores in fishing villages was quitedifferent from the merchandise carried by stores located in farming communities. In met-ropolitan areas, such as Amsterdam and The Hague, Heijn established large stores thatstocked a complete range of food products and household merchandise. In fact, Heijn’scompany was credited with developing the supermarket concept in The Netherlands; inlater years, his company popularized the convenience store format in his home country.

In the early 1900s, Heijn launched his own brand of baked products, including cookiesand assorted pastries that he sold in his grocery stores. Over the years to come, the companywould develop a wide range of its own products that it marketed under the Albert Heijnbrand. In 1973, management changed the company’s name to Ahold. The following decade,Queen Beatrix awarded the title ‘‘Royal’’ to the company, a designation reserved for Dutchcompanies that have operated continuously—and honorably—for 100 years.2

By the early 1990s, Royal Ahold ranked among the most prominent and respectedcorporations in The Netherlands. For several years during that time, Royal Ahold wasnamed the most desirable employer in The Netherlands and the company with the bestreputation in that nation (Kolk and Pinske 2006). The company was also well known outsideof The Netherlands. In 1948, the Heijn family had taken the company public. By 2000, thecompany’s stock was registered on stock exchanges around the world, including the NewYork Stock Exchange.

A financial scandal shortly after the turn of the century besmirched Royal Ahold’ssterling reputation, prompted a consumer boycott of the company in The Netherlands, andresulted in many critics insisting that the Dutch royal family rescind the company’s ‘‘royal’’designation. In March 2003, The Economist, one of Europe’s most prominent businesspublications, referred to the Royal Ahold scandal as ‘‘Europe’s Enron’’ (Economist 2003).The Royal Ahold scandal, along with the accounting fraud at the giant Italian firm Parmalat,caused the European Union (EU) to impose more extensive and rigorous regulation on thefinancial reporting system and independent audit function within its member nations. TheRoyal Ahold debacle also reignited the debate regarding the need for more uniform ac-counting and auditing standards around the globe.

GOING GLOBALBy the mid-1970s, Royal Ahold’s management realized that, for the company to con-

tinue to grow, it could not limit its operations to The Netherlands, since it dominated theretail grocery market in that country. At that point, the company’s top executives, who hadlong been known for their conservative operating and financial policies, startled the Dutchbusiness community by announcing that Royal Ahold would expand its operations intoother countries.

2 ‘‘N.V.’’ is an abbreviation for ‘‘naamloze vennootschap.’’ This phrase indicates that Royal Ahold is a limitedliability company under Dutch federal law whose ownership shares are publicly traded. In The Netherlands, thecompany is known as Koninklijke Ahold, N.V.; in English-speaking countries, the company is referred to asRoyal Ahold, N.V.

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Royal Ahold’s expansion efforts got off to a slow start, but then accelerated rapidly inthe 1990s after the company hired a new management team. Until the late 1980s, membersof the Heijn family had occupied the key management positions within the firm. In 1987,two grandsons of Albert Heijn, Ab Heijn and Gerrit-Jan Heijn, served as Royal Ahold’stwo top executives. In September 1987, Gerrit-Jan Heijn was kidnapped and murdered;shortly thereafter, his older brother retired from the company.3 The professional manage-ment team hired to replace the Heijn brothers recognized that the quickest way for RoyalAhold to gain significant market share in the grocery retailing industry outside of TheNetherlands was to purchase existing grocery chains in foreign countries. To finance theirgrowth-by-acquisition policy, Royal Ahold’s new executives raised large amounts of debtand equity capital during the 1990s.

By 2000, Royal Ahold had purchased retail grocery chains in Asia, Eastern Europe,Latin America, Portugal, Scandinavia, South America, and the United States. This aggres-sive expansion campaign made Royal Ahold the third-largest grocery retailer worldwide bythe turn of the century. At the time, only U.S.-based Wal-Mart and the French firm CarrefourSA had larger annual retail grocery sales than Royal Ahold.

Royal Ahold completed its most ambitious acquisition in 2000 when it purchased U.S.Foodservice, a large food wholesaler headquartered in Columbia, Maryland, a suburb ofWashington, D.C. Although Royal Ahold had previously purchased several retail grocerychains along the eastern seaboard of the United States, including New England-based Stop& Shop, U.S. Foodservice was easily the largest U.S. company it had acquired. The U.S.Foodservice acquisition was also important because it signaled the company’s commitmentto becoming a significant participant in the food wholesaling industry.

In 2003, after purchasing two smaller U.S.-based food distributors, Royal Ahold rankedas the second largest food wholesaler in the United States—Houston-based Sysco Cor-poration was the largest. In fact, the three U.S. acquisitions caused food wholesaling to bethe company’s largest source of revenue, accounting for slightly more than one-half of itsannual sales. The company’s more than 4,000 retail grocery stores located in 27 countriesaccounted for the remainder of its annual sales.

Royal Ahold’s aggressive expansion plan created significant and largely unexpectedproblems for the company. Among these problems was the impact that key differences incultural norms and expectations had on the company’s ability to manage its worldwideretail grocery operations. As the company entered new markets, particularly markets outsideof Western Europe and the United States, it encountered a wide range of laws, regulations,and cultural nuances that had far-reaching implications for the management of retail groceryoperations.

Human resource policies regarding hiring, promotion, and employee benefits that hadbeen developed in The Netherlands were not necessarily well received by Royal Ahold’snew managers and employees in Asia, Latin America, and South America. Likewise, be-cause grocery shopping is a ritual significantly influenced by longstanding cultural normsacross the globe, company officials found that customers in new markets often did not

3 The Clearing, a major motion picture released in 2004 that starred Robert Redford and Willem DaFoe, wasbased upon the key facts surrounding the kidnapping and murder of Gerrit-Jan Heijn, although the setting ofthe film was changed to the United States. Ironically, the perpetrator of the vicious crime was eventuallyapprehended when he attempted to purchase food in a grocery store with currency from the ransom that he hadbeen paid by the Heijn family. After serving 12 years of a 20-year sentence, the kidnapper /murderer was releasedand returned to live with his family in The Netherlands. To protect the individual’s privacy, the Dutch mediainsists on referring to him by his first name only.

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appreciate and sometimes flatly rejected the ‘‘Dutch’’ way of organizing and managing agrocery store.

Particularly problematic for Royal Ahold was the staunch opposition of consumers incertain markets to the takeover of their local grocery store by an unknown foreign ‘‘in-vader.’’ Because of such problems, Royal Ahold’s executives eventually decided that thebest strategy to use in managing their foreign grocery chains was to allow most majordecisions to be made by the management personnel of those chains who were typicallyretained following an acquisition.

The headaches that Royal Ahold encountered due to rapidly expanding into retail gro-cery markets around the world were compounded by the company’s decision to become amajor player in the wholesaling segment of the huge food industry in the United States.Because company officials were largely unfamiliar with that segment of the industry, theyapplied their new hands-off mindset to that acquisition and relied almost exclusively onthe executives of U.S. Foodservice who were retained following the buyout to oversee thesubsidiary’s day-to-day operations.

There was one key exception to the hands-off policy that Royal Ahold adopted withrespect to its foreign operations. The company’s top executives in The Netherlands insistedthat foreign operating units be held to the same rigorous performance standards that wereimposed on the company’s domestic operations. During the 1990s, the company’s newmanagement team established a goal of achieving a 15 percent annual growth rate in profits.That overall goal was then used by top management to establish annual earnings targetsfor each of the company’s operating units in The Netherlands and elsewhere.

Royal Ahold’s senior management pressured mid- and lower-level managers throughoutthe company’s worldwide network to reach the earnings goal established for their individualoperating units. According to a former Royal Ahold official, managers who met their unit’searnings target were rewarded with significant year-end bonuses. ‘‘Ahold was determinedto maintain earnings growth of at least 15% annually. All of the operating units had difficulttargets to meet, but the rewards [in the form of bonuses] were good if targets were met’’(Raghavan et al. 2003). In retrospect, the earnings targets for many of Royal Ahold’s newlyacquired operating units were unrealistic. Intense competition and the historically modestprofit margins within the food industry prevented many of those units from achieving theannual earnings goals that had been assigned to them.

Similar to most major corporations, Royal Ahold had an ethical code that discouragedexecutives and employees from engaging in dishonest or otherwise unethical conduct. Thecompany’s Code of Professional Conduct included the following section that dealt specif-ically with accounting and financial reporting matters.

The integrity and completeness of record keeping is not only Ahold policy, but also law.We properly, accurately, and fairly record our financial transactions. Preventing fraud isan important priority at Ahold, both to protect Ahold’s reputation and to prevent loss.Fraud is defined as committing illicit or illegal acts involving money and/or goods toachieve financial benefit, to benefit oneself or others, at a disadvantage to the companyor others. (Royal Ahold 2002)

Despite such strong statements, the heavy emphasis by Royal Ahold’s top management onachieving financial goals prodded many of its employees to engage in self-serving behaviorthat materially distorted the company’s periodic financial statements. When Royal Ahold’sindependent auditors discovered the misrepresentations in those financial statements, theprominent corporation suffered widespread embarrassment and condemnation as well asfinancial problems that threatened its ability to remain a going concern.



ROYAL PROBLEMSDeloitte Accountants, B.V.,4 had served as Royal Ahold’s ‘‘group auditor’’ since 1973.

The ‘‘group auditor’’ designation means that The Netherlands-based Deloitte Accountantsoversaw the audits of the company’s annual consolidated financial statements, althoughaccounting firms in other countries, such as the United States, participated in those audits.Deloitte shocked Royal Ahold’s top executives when the accounting firm announced inearly 2003 that it was suspending its fiscal year 2002 audit of the company. According toDeloitte, auditors assigned to various operating units of Royal Ahold had uncovered ques-tionable accounting and financial reporting practices that had to be thoroughly investigatedbefore the audit could be completed.

Deloitte’s announcement sent Royal Ahold’s stock price into a nosedive. Over a shortperiod of time in early 2003, the company’s stock price plummeted by approximately 70percent. During this same time frame, Standard & Poor’s and Moody’s slashed RoyalAhold’s credit rating, which drove down the market price of the company’s outstandingdebt securities and made it extremely difficult for the company to raise additional capitalin either the debt or equity markets. The problems facing Royal Ahold caused one London-based financial analyst to suggest that there was a very real risk that the large firm wouldbe forced into bankruptcy (de Boer 2003).

Royal Ahold’s board of directors responded quickly to the crisis that engulfed thecompany following Deloitte’s decision to suspend its 2002 audit.5 The board’s first majordecision was to fire Royal Ahold’s chief executive officer (CEO) and chief financial officer(CFO), each of whom had been implicated in the company’s accounting irregularities. Theboard also announced plans to raise much-needed capital by selling several of its foreignsubsidiaries. Finally, and most importantly, Royal Ahold’s board pledged that it would fullycooperate with all law enforcement and regulatory agencies investigating the company’sfinancial affairs and take the appropriate measures to ensure that the sources of the ac-counting problems were identified and eliminated. These measures served to bolster theflagging confidence of investors and lenders in the company.

ACCOUNTING AND DISCLOSURE ISSUES AT ROYAL AHOLDThe investigative agencies that scrutinized Royal Ahold’s accounting records identified

three principal sources of the material misrepresentations in the company’s financial state-ments. Royal Ahold had improperly included financial data of certain foreign joint venturesin its consolidated financial statements, which resulted in large overstatements of its con-solidated revenues and assets. Related to this matter were aggressive accounting decisionsthat the company made in recording the initial investments in foreign joint venture com-panies. Finally, a forensic investigation authorized by Royal Ahold’s senior managementuncovered extensive fraud in the accounting records of U.S. Foodservice, the company’slarge United States subsidiary.

Royal Ahold’s 2001 financial statements were the final financial statements issued bythe company for a complete fiscal year prior to the discovery of the accounting fraud.Exhibits 1 and 2 present the comparative income statements and balance sheets, respec-tively, included in the Form 20-F registration statement filed by Royal Ahold with theSecurities and Exchange Commission (SEC) for fiscal 2001. Foreign companies registered

4 ‘‘B.V.’’ is an abbreviation for ‘‘besloten vennootschap.’’ This phrase indicates that Deloitte Accountants is alimited liability company whose ownership shares are privately registered and thus not freely transferable.

5 In fact, major Dutch companies typically have a two-tiered corporate governance structure that consists of a‘‘supervisory board’’ and a ‘‘management board.’’ For purposes of this case, Royal Ahold’s two boards aresimply referred to as the ‘‘board of directors.’’

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EXHIBIT 1Royal Ahold, N.V., Consolidated Statements of Earnings

(expressed in thousands of Euros, except share and per share amounts)

Fiscal Year2001 2000 1999

NET SALES 66,593,065 51,541,601 32,824,327Cost of Sales (51,877,136) (39,654,486) (24,470,282)

GROSS PROFIT 14,715,929 11,887,115 8,354,045Selling Expenses (9,650,092) (7,905,310) (5,806,134)General and Administrative Expenses (2,087,536) (1,702,476) (1,133,239)Goodwill Amortization (166,496) (5,236) —Exceptional Results (106,413) — —

OPERATING RESULTS 2,705,392 2,274,093 1,414,672Interest Income 90,065 87,021 58,589Interest Expenses (1,020,853) (808,990) (420,820)Exchange Rate Differences (101,484) 51,542 (6,479)Other Financial Income and Expense (961) 1,162 2,516Net Financial Expense (1,033,233) (669,265) (366,194)

EARNINGS BEFORE INCOME TAXESAND MINORITY INTEREST

1,672,159 1,604,828 1,048,478

Income Taxes (457,364) (401,010) (283,001)

EARNINGS AFTER INCOME TAXESAND BEFORE MINORITY INTEREST

1,214,795 1,203,818 765,477

Income from Unconsolidated Companies 14,553 14,562 7,437Minority Interests (115,827) (102,389) (20,807)NET EARNINGS 1,113,521 1,115,991 752,107

Dividend Cumulative Preferred FinancingShares 38,177 17,444 12,167

NET EARNINGS AFTER PREFERREDDIVIDENDS

1,075,344 1,098,547 739,940

Weighted Average Number of CommonShares Outstanding (� 1,000)

857,509 737,403 657,230

EARNINGS PER COMMON SHARE 1.25 1.49 1.13DILUTED EARNINGS PER COMMON

SHARE1.23 1.43 1.10

Source: Royal Ahold’s 2001 Form 20-F filed with the Securities and Exchange Commission.

with the SEC file a Form 20-F annually with that federal agency, a registration statementcomparable in most respects to the Form 10-K filed with the SEC by U.S.-based companies.

Similar to other foreign registrants, the SEC’s regulations required Royal Ahold toinclude in its annual Form 20-F, a schedule that reconciled its net income determined underDutch-based GAAP to the net income that would have been produced by the applicationof U.S. GAAP. Exhibit 3 presents those reconciliations for the three-year period 1999–2001.

Joint Venture AccountingThe growth-oriented policies of the management team hired to replace Ab and Gerrit-

Jan Heijn stressed the importance of not only achieving an annual earnings growth rate of



EXHIBIT 2Royal Ahold, N.V., Consolidated Balance Sheets

(expressed in thousands of Euros)

December 30,2001

December 31,2000

ASSETSCURRENT ASSETS:Cash and Cash Equivalents 1,972,273 1,335,592Receivables 3,453,869 2,849,275Inventories 5,067,035 4,100,223Other Current Assets 551,106 576,876

TOTAL CURRENT ASSETS 11,044,283 8,861,966

NON-CURRENT ASSETS:Tangible Fixed Assets, Net of

Depreciation:Buildings and Land 7,659,768 6,855,938Machinery and Equipment and Other 5,698,480 4,730,821Under Construction 713,581 645,892

Total Tangible Fixed Assets 14,071,829 12,232,651Intangible Fixed Assets, Net of Amortization 5,648,679 3,152,688Investments in Unconsolidated Companies 424,066 407,843Loans Receivable 534,157 414,055Deferred Income Taxes 513,450 391,421

TOTAL NON-CURRENT ASSETS 21,192,181 16,598,658

TOTAL ASSETS 32,236,464 25,460,624

LIABILITIES AND SHAREHOLDERS’ EQUITYCURRENT LIABILITIES:Loans Payable 1,848,912 2,335,345Taxes Payable 715,850 551,185Accounts Payable 6,029,505 5,185,432Accrued Expenses 1,530,520 1,418,778Other Current Liabilities 945,799 710,120

TOTAL CURRENT LIABILITIES 11,070,586 10,220,860LONG-TERM LIABILITIES:Subordinated Loans 1,779,684 1,779,907Other Loans 9,282,752 7,183,514

Total Subordinated Loans & Other 11,062,436 8,963,421Capitalized Lease Commitments 1,512,236 1,336,567Deferred Income Taxes 437,982 362,949Other Provisions 1,576,570 1,396,882

TOTAL LONG-TERM LIABILITIES 14,589,224 12,059,819COMMITMENTS AND CONTINGENCIES (Note 20)MINORITY INTEREST 684,540 677,379SHAREHOLDERS’ EQUITY:Cumulative Preferred Shares — —Cumulative Preferred Financing Shares 64,829 64,829Common Shares 230,245 204,213Additional Paid-in Capital 11,218,491 8,675,969

(continued on next page)

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EXHIBIT 2 (continued)

December 30,2001

December 31,2000

Revaluation Reserve 20,521 26,124Reserve Shareholdings 34,668 14,589Reserve for Exchange Rate Differences (189,714) (85,270)General Reserve (5,486,926) (6,397,888)

TOTAL SHAREHOLDERS’ EQUITY 5,892,114 2,502,566

TOTAL LIABILITIES AND SHAREHOLDERS’EQUITY 32,236,464 25,460,624


EXHIBIT 3Reconciliation of Royal Ahold’s Net Earnings

Based on Dutch GAAP to Its Net Earnings Based on U.S. GAAP(expressed in thousands of Euros)

Fiscal Year2001 2000 1999

Net Earnings in Accordance with Dutch GAAP 1,113,521 1,115,991 752,107Items Having the Effect of Increasing

(Decreasing) Reported Net Earnings:a) Goodwill (728,210) (300,266) (147,378)b) Pensions 23,811 16,596 6,552c) Revaluation of Real Estate 1,882 2,175 2,263d) Restructuring costs 33,219 (1,143) (19,202)e) Other Provisions (57,556) (21,434) (28,630)f) Sale-leaseback of Property (137,421) — —g) Derivatives (132,549) — —h) Software Costs (5,360) (5,360) 10,109i) Deferred Taxes 46,648 4,494 9,825

Subtotal 157,985 811,053 585,646j) Dividends on Cumulative Preferred

Financing Shares(38,177) (17,444) (12,167)

Net Earnings in Accordance with U.S. GAAPApplicable to Common Shares

119,808 793,609 573,479


15 percent, but also placed a heavy emphasis on rapidly expanding the company’s annualrevenues. The new management team established a goal of doubling Royal Ahold’s totalsales every five years. Royal Ahold’s growth-through-acquisition strategy allowed the com-pany to increase its total reported sales from approximately �C7.7 billion in 1990 to �C62.7billion in 2002. This dramatic increase in revenues yielded important benefits for the com-pany. Most important, the impressive revenue growth gave Royal Ahold increasing credi-bility in the global equity and debt markets, which, in turn, allowed the company to raisethe capital needed to finance its expansion program.

During the fiscal 2002 audit of Royal Ahold, Deloitte Accountants uncovered evidencesuggesting that the company’s consolidated revenues had been overstated. When Royal



Ahold invested in a foreign company, it often acquired exactly 50 percent ownership interestin the given company. Nevertheless, Royal Ahold would fully consolidate the company’sfinancial data in its annual financial statements. Dutch accounting rules at the time permitteda parent company to fully consolidate the financial data of a joint venture company if theparent could control that firm’s operations. Such control could be evidenced by a more than50 percent ownership interest in the joint venture company or by other means.

Since Royal Ahold owned exactly 50 percent ownership interest in several foreign firms,the company’s executives had to persuade the Deloitte auditors that they exercised effectivecontrol over those firms’ operations to include their financial data in Royal Ahold’s con-solidated financial statements. To accomplish this goal, the company’s top executives gavethe auditors letters signed by key officials of the given joint venture companies. Theseletters informed the auditors that despite having only 50 percent ownership interest in thecompany in question, Royal Ahold exercised effective control over the company’s opera-tions. In fact, Royal Ahold’s management team had goaded officials of the joint venturecompanies to provide these letters to the Deloitte auditors. At the same time the ‘‘controlletters’’ were forwarded to Deloitte, Royal Ahold’s management signed ‘‘side letters’’ ad-dressed to the executives of the joint venture companies that negated the control letters.The side letters indicated that major decisions affecting the joint venture companies wouldbe made mutually by Royal Ahold executives and the other owners or executives of thosecompanies.

Because Royal Ahold did not have effective control over the joint venture companiesin which it had only 50 percent ownership interest, those companies’ operating resultsshould not have been fully consolidated in the annual Royal Ahold financial statements.For Dutch accounting purposes, the joint ventures’ operating results should have been pro-portionately consolidated in Royal Ahold’s annual financial statements. For example, 50percent of the total revenues and expenses of the joint venture companies should have beenincluded in Royal Ahold’s annual consolidated income statement.

The decision to fully consolidate the financial data of the joint venture companiesresulted in material misstatements of Royal Ahold’s consolidated financial statements. Inits 2001 consolidated balance sheet, Royal Ahold reported total assets of �C32.2 billion.That figure included �C4.4 billion of assets that Dutch regulatory authorities required RoyalAhold to deconsolidate when the company subsequently issued restated financial statements.Likewise, the improper joint venture accounting overstated Royal Ahold’s reported con-solidated revenues of �C66.6 billion for 2001 by �C12.2 billion.

Aside from improperly accounting for its ownership interests in numerous joint venturecompanies, Royal Ahold failed to disclose that it had an obligation to purchase the own-ership interests of certain investors in those companies. For example, Royal Ahold hadcommitted itself to purchasing the residual ownership interest in a joint venture companybased in Argentina that was held by a prominent family in Uruguay. The Uruguayan familycould only exercise the buyout agreement if the company defaulted on its outstanding debt.Because of poor economic conditions in South America, the Argentine company defaultedon its outstanding debt in 2002, resulting in Royal Ahold being required to buy out theownership interest of the Uruguayan family.

Initial Accounting for Investments in Foreign Joint VenturesIn the late 1990s, Dutch accounting principles allowed companies to charge off against

stockholders’ equity goodwill arising from the acquisition of another company. Under U.S.GAAP at the time, companies were required to report goodwill resulting from an acquisitionas an asset and to amortize that asset to expense over a time period not to exceed 40 years.

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As Royal Ahold acquired ownership interests in an increasing number of companiesduring the late 1990s, the company became increasingly aggressive in accounting for theinitial purchase transactions. In particular, Royal Ahold inflated the amount of goodwillarising from acquisitions of other companies. The company also improperly charged offvarious acquisition-related expenses to stockholders’ equity at the time of each acquisition.These abusive accounting practices helped Royal Ahold management meet or exceed itsgoal of achieving 15 percent earnings growth each year. The restated financial statementssubsequently issued by Royal Ahold revealed that improper ‘‘acquisition accounting’’ hadinflated the company’s reported net income for 2001 and 2000 by �C36 million and �C8million, respectively.

Fraudulent Accounting at U.S. FoodserviceDeloitte Accountants’ U.S. affiliate, Deloitte & Touche, audited the financial statements

of U.S. Foodservice after that company was acquired by Royal Ahold in 2000. Prior to thattime, U.S. Foodservice had been audited by KPMG. During the fiscal 2002 audit of U.S.Foodservice, the Deloitte auditors uncovered improper accounting decisions that had amaterial impact on the company’s reported profit for that year. The improper accounting atU.S. Foodservice also materially distorted the consolidated net income of Royal Ahold.Deloitte’s subsequent investigation revealed that U.S. Foodservice had been intentionallymisrepresenting its financial statements for several years prior to its acquisition by RoyalAhold.

The accounting fraud at U.S. Foodservice involved promotional allowances. Becausethe food wholesaling industry is intensely competitive, the companies operating in thatindustry have very small profit margins on their sales. In fact, the profit margins within theindustry result principally from rebates, quantity discounts, program money, and other pro-motional allowances paid to food wholesalers by their suppliers or vendors. For example,if U.S. Foodservice purchased $100 million of merchandise from General Mills during2002, then General Mills may have refunded 5 percent of that amount to U.S. Foodservice.Generally, the more merchandise purchased from a vendor by a food wholesaler, the largerthe promotional allowance on a percentage basis.

U.S. Foodservice had various contractual agreements with its vendors regarding thevolume of promotional allowances to which it was entitled and the timing of the relatedpayments. A common agreement involved the prepayment of promotional allowances toU.S. Foodservice based upon an expected minimum amount of purchase volume over amulti-year period. Suppose, for example, that U.S. Foodservice expected to purchase $30million from a given vendor over the three-year period 2000–2002. The vendor may haveagreed to pay U.S. Foodservice $900,000, or 3 percent of that amount, as a promotionalallowance. Most likely, the payment would have been made in early 2000, within the firstfew weeks of the period covered by the contractual agreement between the two parties.

Despite the material effect that promotional allowances had on U.S. Foodservice’s op-erating results, the company did not have a systematic method of accounting for thoseallowances. ‘‘USF had no comprehensive, automated system for tracking the amounts owedby vendors pursuant to the promotional allowance agreements’’ (SEC 2004a). The absenceof proper internal controls over promotional allowances provided an opportunity for dis-honest employees to overstate those allowances for accounting purposes, which is exactlywhat occurred beginning in the late 1990s. When Royal Ahold acquired U.S. Foodservicein 2000, the improper accounting for promotional allowances escalated. Apparently, manyU.S. Foodservice managers began overstating promotional allowances to ensure that theiroperating units reached the challenging earnings goals assigned to them by Royal Ahold.



Among the most common methods used by U.S. Foodservice managers to overstatetheir promotional allowances was to simply inflate the promotional allowance percentagesallegedly being paid by given vendors. If a vendor had agreed to pay a 5 percent refundon purchases, then U.S. Foodservice might record a promotional allowance equal to 7percent of the purchases made from that vendor. Another common scheme was front-loading promotional allowances. For example, suppose that a vendor paid U.S. Foodservicea $2 million promotional allowance for the three-year period 2000–2002. U.S. Foodser-vice might record the full amount of that allowance as a reduction in cost of sales for 2000rather than prorating the allowance over the three-year period. Eventually, some U.S. Food-service managers resorted to recording totally fictitious promotional allowances near theend of an accounting period to ensure that their operating unit reached that period’s earningsgoal. These fictitious promotional allowances were typically recorded as ‘‘topside’’ adjust-ments to U.S. Foodservice’s financial statements after the company’s accounting recordshad been closed at the end of an accounting period.6

Of the three principal accounting frauds used by Royal Ahold to misrepresent its re-ported operating results, the improper accounting for promotional allowances at U.S. Food-service easily had the most dramatic impact on the company’s reported profits. In 2001,alone, the improper accounting for the promotional allowances overstated Royal Ahold’searnings by approximately �C215 million. This amount accounted for 60 percent of the netoverstatement of Royal Ahold’s 2001 reported net income. As shown in Exhibit 1, thecompany reported a net income of �C1.11 billion for 2001; the actual earnings figure forthat year was �C750 million.

PINPOINTING RESPONSIBILITY FOR THE ROYAL AHOLD FIASCOIn the fall of 2003, Royal Ahold issued restated financial statements for 2000, 2001,

and the first three quarters of 2002. The net income figures that Royal Ahold originallyreported for those three periods had been overstated by 17.6 percent, 32.6 percent, and 88.1percent, respectively. The corresponding overstatements of the company’s reported revenuesfor those three periods were 20.8 percent, 18.6 percent, and 13.8 percent, respectively.

Similar to other recent accounting and financial reporting scandals, the public disclosureof the Royal Ahold fraud triggered a search by regulatory agencies, law enforcement au-thorities, the business press, and the investment community for the parties responsible forthe fraud. Among the most culpable parties were the top executives of Royal Ahold. Thenew management team hired by the company’s board to replace Ab and Gerrit-Jan Heijncreated an environment in which fraud often develops and flourishes. The pressure exertedby that management team on their subordinates to achieve unrealistic earnings and revenuegoals, when coupled with the significant incentive compensation that could be earned byreaching those goals, almost certainly prompted much of the self-serving behavior withinRoyal Ahold.

Despite the fact that Royal Ahold’s Deloitte auditors were intentionally misled by thecompany’s executives and the fact that those auditors were ultimately responsible for endingthe fraud, many parties believed that Deloitte should have discovered and revealed the fraudearlier than it did. In fact, Deloitte was named as a defendant in several large class-actionlawsuits filed subsequent to the first published reports of the fraud. In defense of the Deloitteauditors, they faced an onerous task each year in planning and coordinating an annual audit

6 ‘‘Topside’’ adjustments are made directly to a company’s financial statements without first being recorded in itsaccounting records.

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that was, in reality, audits of dozens of individual operating units loosely organized underthe Royal Ahold corporate umbrella.

Many parties also held regulatory agencies and oversight bodies within the accountingprofession at least partially responsible for the Royal Ahold debacle. The Royal Ahold caseclearly confirmed the need for what the London-based Financial Times referred to as‘‘cross-border cooperation’’ between and among the regulatory agencies and rule-makingbodies that oversee financial reporting and independent auditing across the globe (Koster2004). In recent years, a spirit of competition has often prevailed between such organiza-tions, particularly between those organizations in the United States and those in otherdeveloped countries.

The principal source of tension among international rule-making bodies in the account-ing profession has been differing philosophies regarding what should be the fundamentalnature of professional standards. The Financial Accounting Standards Board in the UnitedStates has generally insisted on issuing prescriptive, or detailed, accounting standards. Onthe other hand, the International Accounting Standards Board, which is responsible forissuing International Financial Reporting Standards that EU-based companies were requiredto adopt by 2005, believes that accounting standards should be general guidelines that areprinciples-based. This philosophical difference often results in financial statements preparedfor a company under U.S. and EU accounting rules that are not comparable. Such lack ofcomparability can result in confusion on the part of financial statement users and, ultimately,in less than optimal decisions on their part.

Even more tension between international oversight bodies in the accounting and au-diting disciplines was spawned by the Royal Ahold case when the U.S.-based Public Com-panies Accounting Oversight Board (PCAOB) used the case to justify one of its mostcontroversial policies. This policy required non-U.S. accounting firms to register with thePCAOB and be subject to the PCAOB’s regulatory oversight. As the Royal Ahold scandalwas unfolding, the PCAOB implied that the case demonstrated that non-U.S. regulatorybodies within the accounting and auditing disciplines were not doing an adequate job ofcarrying out their oversight responsibilities (de Jong et al. 2005). The PCAOB’s insinuationprompted indignant responses from professional organizations within several membernations of the EU and other nations as well. For example, the Japanese Institute of CertifiedPublic Accountants (JICPA) sent an open letter to the SEC in which it criticized thePCAOB’s policy: ‘‘We believe that the oversight system [for independent audits] in Japanshould be relied upon without necessitating PCAOB inspection. Japan has an oversightsystem which is equivalent to the oversight required of professional accountants in theU.S.’’7

Finally, many parties charged that a large measure of responsibility for the recent seriesof audit failures involving multinational corporations, such as Royal Ahold and Parmalat,should be borne collectively by the small fraternity of international accounting firms thatdominate the global auditing discipline. According to the Financial Times, the major inter-national accounting firms have ‘‘franchised their names like the McDonald’s burger chain,but without its quality control’’ (Plender 2004). The Financial Times went on to note thatthe major accounting firms are, in fact, only ‘‘loose confederal’’ organizations. As a result,users of audited financial statements of multinational corporations located across the globe

7 Letter addressed to Jonathan Katz, member of the SEC, dated June 27, 2003, from Akio Okuyama, Presidentand CEO of the Japanese Institute of Certified Public Accountants. Available at SEC website: http: / /www.sec.gov.

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have no basis for judging the quality of those audits, even if they are performed by ac-counting firms within the same organization.

EPILOGUEFollowing the public disclosure of the Royal Ahold fraud in 2003, both Dutch and U.S.

law enforcement authorities filed criminal charges against the company and several of itsformer executives. The Financial Times reported that the Royal Ahold case was the ‘‘mostsignificant white-collar criminal case’’ (Bickerton 2006) ever pursued by federal authoritiesin The Netherlands. Shortly after criminal charges were filed in the case, a Dutch prosecutorasked the SEC not to pursue the charges that it had filed against the company and its formerexecutives, since doing so would raise a ‘‘double jeopardy’’ issue under Dutch law. Inresponding to the request, the SEC noted that ‘‘because of the importance of the case inThe Netherlands and the need for further cooperation between the SEC and regulatoryauthorities in other countries, the Commission has agreed to the Dutch prosecutor’s request’’(SEC 2004b).

In September 2004, the fraud charges filed against Royal Ahold by Dutch law enforce-ment authorities were settled. The settlement required Royal Ahold to pay a fine of ap-proximately �C8 million. In May 2006, a Dutch federal court found three of Royal Ahold’sformer executives guilty of fraud charges that had been filed against them. Those executivesincluded the company’s former CEO and CFO. The tribunal of judges that presided overthe case gave the three former executives suspended prison sentences ranging from four tonine months. In addition, the three men received fines ranging from �C120,000 to �C225,000.One of the judges who presided over the case defended the light sentences imposed on thethree individuals by maintaining that, although the Royal Ahold fraud was unfortunate andembarrassing to the Dutch business community and Dutch citizens, it was not nearly asserious as either the Enron scandal in the United States or the Parmalat scandal in Italy(Sterling 2006).

A shareholders’ activist group in The Netherlands was appalled by the minimal pen-alties imposed on the three former Royal Ahold executives. A spokesperson for that groupnoted that ‘‘the judgment sends a signal to managers that no matter what they do, the riskof a heavy punishment is minimal. In the United States, a conviction on the same factswould have led to a prison term of more than ten years. This is Holland at its smallest’’(Sterling 2006).

In July 2004, the SEC announced that it had filed fraud charges against four formerexecutives of U.S. Foodservice. These individuals included the company’s former CFO,former chief marketing officer, and two former executives in the company’s purchasingdivision. The two former purchasing executives settled the charges by agreeing to permanentinjunctions that prohibited them from being officers or directors of public companies andby forfeiting stock market gains they had earned on the sale of Royal Ahold’s commonstock during the course of the fraud. In September 2006, the former CFO pleaded guiltyto one count of conspiracy and was given three years of probation by a federal judge. InNovember 2006, a federal jury found U.S. Foodservice’s former chief marketing officerguilty of conspiracy and federal securities fraud. In 2007, he was sentenced to seven yearsin federal prison.

In February 2006, the SEC filed charges against two former auditors of U.S. Foodser-vice, the audit engagement partner and senior audit manager who had been assigned to thecompany’s 1999 audit engagement team. From 1996 through the conclusion of the 1999audit in April 2000, KPMG had served as the independent audit firm of U.S. Foodservice.

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When the company was acquired by Royal Ahold in 2000, Deloitte Accountants, B.V.,chose Deloitte & Touche to audit the U.S. Foodservice financial statements that were to beincorporated in Royal Ahold’s consolidated financial statements.

The SEC alleged that the two former KPMG auditors violated numerous GAAS duringthe performance of the 1999 U.S. Foodservice audit and, in fact, had identified severalinstances in which the company had improperly recorded promotional allowances. Accord-ing to the SEC, the two auditors used white correction fluid to obscure audit exceptionsthat documented improper promotional allowances booked by the company. Those auditexceptions were allegedly masked by correction fluid before the U.S. Foodservice work-papers were turned over to the SEC, which had requested the workpapers during the courseof its investigation of the U.S. Foodservice accounting fraud. The SEC also charged thatthe two auditors failed to inform U.S. Foodservice’s audit committee of serious internalcontrol problems related to the accounting for promotional allowances that they discoveredduring the 1999 audit.

Among other allegations, the SEC charged that the two auditors frequently relied onimplausible representations made to them by client officials. By failing to investigate thosesuspicious statements and other red flags apparent during the 1999 audit, the SEC main-tained that the two auditors failed to exercise a proper degree of professional skepticism,failed to propose proper adjustments to U.S. Foodservice’s financial statements, and failedto collect sufficient competent evidence to support the audit opinion rendered on thosefinancial statements. In commenting on the case, an SEC spokesperson noted that ‘‘theseauditors had evidence in their hands that could have stopped the fraud in its tracks. Instead,because they failed to exercise appropriate professional skepticism, the fraud was allowedto continue’’ (Walker 2006). The charges filed by the SEC against the two KPMG auditorsare still pending.8

In November 2005, the SEC announced that it had filed enforcement actions againstseveral individuals who were employees or executives of major U.S. Foodservice vendors.According to the SEC, each of these individuals had signed false confirmations regardingthe amount of promotional allowances owed to U.S. Foodservice by their given company.The SEC reported that several of these individuals had been pressured to sign and returnthe false confirmations to U.S. Foodservice’s independent auditors by management person-nel of that company. In one case, an executive of a food vendor signed a confirmationindicating that his company owed U.S. Foodservice $3.2 million when the actual amountwas only $68,000. Each of the individuals agreed to pay a $25,000 fine to the SEC to settlethe charges filed against them. In commenting on the settlement of these charges, an SECspokesperson noted that ‘‘the use of third-party confirmations is an important part of theaudit process, and the Commission will hold accountable those who work to subvert it’’(Taub 2005).

Also in November 2005, Royal Ahold announced that it had reached an agreement tosettle a large class-action lawsuit filed against it by the company’s stockholders and formerstockholders. Under the terms of the agreement, Royal Ahold contributed approximately�C1.1 billion to a settlement pool that would be distributed to the class-action plaintiffs.Shortly after the announcement of this settlement, another class-action lawsuit filed by

8 The SEC did not file any charges against members of the Deloitte & Touche audit engagement teams assignedto the 2000 and 2001 U.S. Foodservice audits. Recall that the Deloitte & Touche auditors uncovered the fraud-ulent accounting for the promotional allowances near the completion of the fiscal 2002 audit of U.S. Foodservice.However, Deloitte & Touche reportedly questioned whether Royal Ahold was properly accounting for promo-tional allowances as early as the 2000 audit.



Royal Ahold’s U.S. stockholders against the company’s Deloitte auditors was announced.That pending lawsuit seeks damages of approximately �C3 billion. Approximately one yearlater, in November 2006, Royal Ahold announced its intention to sell U.S. Foodservice.

In responding to the controversy generated by the Royal Ahold debacle, the EuropeanParliament, which is the legislative body of the EU, amended the ‘‘8th Directive’’ thatincludes the various guidelines and rules to be followed by accounting firms performingindependent audits of EU-based companies.9 The new 8th Directive includes a requirementthat foreign accounting firms involved in the audits of EU-based companies must be reg-istered with regulatory authorities in the EU. A European publication noted that this newrequirement was an apparent ‘‘tit-for-tat response’’ to the comparable requirement of thePCAOB (European Information Service 2004).

Among other changes, the revised 8th Directive imposes greater responsibility on groupauditors to review and pass judgment on the overall quality of an independent audit andmandates that member nations of the EU establish effective investigative and disciplinarysystems for accounting firms that perform independent audits. The revised directive alsoestablishes common rules regarding the appointment and resignation of independent audi-tors, requires that auditors obtain appropriate training regarding International Financial Re-porting Standards and International Auditing Standards, and requires audit clients to dis-close the fees paid to their independent auditors for both audit and nonaudit services.

In March 2006, the SEC issued a document entitled ‘‘SEC Rulemaking and OtherInitiatives: Accommodations’’ (SEC 2006). That document outlines accommodations thatthe SEC has agreed to make regarding various stipulations of the Sarbanes-Oxley Act of2002. One of those accommodations involves the SEC’s requirement that foreign accountingfirms that ‘‘audit or provide substantial services relating to the audit of an SEC-registeredentity’’ must register with, and be periodically inspected by, the PCAOB. According to theSEC document, the PCAOB is permitted to place ‘‘varying degrees of reliance on inspec-tions of foreign accounting firms by the home country’s oversight body, based on a slidingscale—the more independent and robust a home country system, the higher the reliance onthat system.’’ Apparently, this accommodation means that if the EU’s 8th Directive is fullyimplemented by EU member nations, then most accounting firms in those nations will beexempt from the PCAOB’s oversight.10

Required

1. To arrive at the U.S. GAAP-based net income figures shown in Exhibit 3, Royal Aholdfully consolidated the operating results of the companies in which it held 50 percentequity interest. For purposes of determining its U.S. GAAP-based net income figures,what accounting method should the company have applied to those investments? Howwould the application of this latter method have affected the U.S. GAAP-based netincome amounts?

2. The application of Dutch GAAP and U.S. GAAP to Royal Ahold’s financial data pro-duced significantly different net earnings figures for the company each year. Explain

9 When the European Parliament adopts a directive, each member nation of the EU is committed to initiatinglegislation that, if enacted, would implement the requirements of that directive. However, the relevant legislativebody within each EU nation may or may not fully adopt the stipulations of a new directive.

10 By April 2006, approximately 1,600 accounting firms had registered with the PCAOB; 540 of those firms werenon-U.S. accounting firms from more than 70 countries.

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what is meant by ‘‘earnings quality.’’ Suppose that the application of IFRS to a com-pany’s financial data produces a higher net income for that company than the appli-cation of U.S. GAAP. Does this mean that the U.S. GAAP-based net income figure isof ‘‘higher quality’’ than the net income figure yielded by IFRS? Explain.

3. Accounting for promotional allowances in the retailing and wholesaling industries haslong been a controversial topic. In 2002, the Emerging Issues Task Force (EITF) of theFinancial Accounting Standards Board began studying that issue. What changes, if any,did the EITF make in the recommended accounting for such promotional allowances?

4. Identify the factors that complicate an independent audit of a multinational company.Explain how these factors affected the audits of Royal Ahold performed by DeloitteAccountants, B.V., and its affiliated firms.

5. Briefly describe the three elements of the ‘‘fraud triangle.’’ Identify the specific fraudrisk factors that were present during the audits of Royal Ahold by Deloitte Accountants.How should those risk factors have affected Deloitte’s audits?

6. What specific audit tests should have been the most effective in detecting the fraudulentaccounting decisions for U.S. Foodservice’s promotional allowances?

7. Royal Ahold’s two major business segments were food wholesaling and retail grocerychains. Identify and briefly explain three key differences in the overall design of anaudit for those two types of business segments.



CASE LEARNING OBJECTIVES AND IMPLEMENTATION GUIDANCEOverview

Your students may be unfamiliar with the Royal Ahold fraud since it was not widelyreported in the United States. Nevertheless, the Royal Ahold debacle was a major account-ing and auditing scandal in Europe that was referred to as ‘‘Europe’s Enron’’ by a prominentEuropean publication. This case confirms that audit failures are not unique to the UnitedStates. In fact, there have been numerous significant audit failures and alleged audit failuresinvolving large companies outside of the United States in recent years, including OAOGazprom (Russia), Parmalat (Italy), Adecco (Switzerland), Kanebo (Japan), Randgold(South Africa), and Lernout & Hauspie (Belgium), to name just a few.

Before discussing this case, ask your students to search online databases for any newdevelopments regarding the case and to provide brief oral reports of their findings. Inparticular, ask them to search for news reports regarding the settlement of the pending civiland criminal litigation referred to in this case. Also ask them to research any recent de-velopments involving the requirement that foreign accounting firms register with thePCAOB.

Primary Learning ObjectivesThis case provides students with insights on accounting, auditing, and control issues

relevant to multinational corporations. In terms of accounting, the case focuses students’attention on the lack of uniformity in accounting standards from one country to the nextand how that lack of uniformity can impact the comparability of a company’s financialstatements that are prepared under differing sets of accounting standards.

Royal Ahold was audited by Deloitte, one of the major international accounting firms.This case demonstrates the challenges that auditors face when planning and performing anaudit of multinational corporations that have operating units in dozens of countries. Thecase also requires students to describe the elements of the fraud triangle, identify specificfraud risk factors that were present during the Royal Ahold audit engagements, and explainhow such factors should affect the performance of an audit. In addition, students mustidentify and discuss key differences in the design and performance of an annual audit forRoyal Ahold’s two major lines of business—namely, retail grocery chains and foodwholesaling.

Finally, this case provides students with an opportunity to examine how importantchanges in a company’s business model and key operational strategies can impact its ac-counting and control functions if those changes are not properly implemented. In particular,the case highlights how an overemphasis on reporting impressive financial results can un-dermine a company’s internal controls and create an environment in which fraudulent ac-tivity is likely to develop.

Implementation GuidanceThis case could be used in a financial accounting course at any level to provide students

with a broad brush introduction to various issues related to international accounting, in-cluding the lack of uniformity in accounting standards around the world. In an introductoryfinancial accounting course, this case could be used early in the semester to acquaint stu-dents with the nature of the accounting and auditing disciplines as well as some of the keychallenges presently facing those disciplines. In intermediate and advanced accountingcourses, this case could be integrated with coverage of intercompany investments and con-solidated financial statements, respectively. The case can also be used in an undergraduate

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or graduate auditing course to illustrate the challenges posed in auditing a large multina-tional corporation. Finally, the diverse array of topics integrated into this case make itsuitable for use in a capstone course for accounting majors.

This case includes three major financial statement exhibits. Exhibits 1 and 2 presentRoyal Ahold’s comparative income statements and balance sheets, respectively, that wereincluded in the company’s 2001 Form 20-F registration statement filed with the SEC. Ex-hibit 3 presents the required reconciliation between Royal Ahold’s Dutch GAAP-based netincome and U.S. GAAP-based net income for each year from 1999 through 2001. Rec-ognize that these financial statements and reconciliations include the impact of the materialerrors resulting from the fraudulent accounting schemes discussed in the case. The restatedfinancial statement data issued by Royal Ahold for fiscal years 2000 and 2001 can be foundin Note 3 to the company’s 2002 financial statements that are included in its annual reportfor that year. That annual report is available at Royal Ahold’s website: http: / /www.ahold.com. Consider asking a group of students to make a brief in-class report of the keydifferences in the original financial statement amounts included in Exhibits 1 and 2 and thecorresponding restated amounts.

Instructors could also require one or more student groups to use Exhibits 1 and 2 toanalyze Royal Ahold’s key financial ratios and trend lines compared to those of competitorsand to industry norms at the time. The results of this analysis could be used to identifyspecific red flags that Royal Ahold’s auditors should have identified in those financialstatements. Finally, consider having one or more student groups investigate and report onunusual items included in Royal Ahold’s balance sheets and income statements. For ex-ample, ask them to research the use of general reserves by Dutch companies and discusswhether or not such reserves are allowed under U.S. GAAP and/or International FinancialReporting Standards. Notice that Royal Ahold reported a very significant general reserveof approximately �C5.5 billion in the shareholders’ equity section of its 2001 balance sheet.

Case Application and Student FeedbackEarlier versions of this case were assigned in an honors section of an introductory

financial accounting course and in a graduate-level auditing seminar populated by Masterof Accountancy students. In the honors financial accounting course, students were requiredto have read the case prior to classroom discussion but were not required to prepare writtenor oral answers to the case questions. The primary goals in using the case in the honorscourse was to demonstrate to students the diversity in accounting rules worldwide, to makethem aware of the controversy that diversity has generated in recent years, and to providethem with insight on the standard-setting processes within the accounting profession. Thecase was also used in the honors course to introduce students to the purpose, nature, andimportance of the independent audit function.

After the honors students were asked to provide their overall thoughts and impressionsregarding the case, an overhead template was used to identify the key facts and issues ofthe case. Students were prompted to comment on the significance and/or implicationsof the items on the template as they were revealed. The case generated considerable dis-cussion and interest among the honors students. In fact, several students expressed aninterest in discussing similar cases. The students were surprised by the lack of uniformityin international accounting standards and questioned why legislative bodies and other gov-ernmental authorities in the major industrialized countries, including the United States, havenot demonstrated a stronger interest in resolving this problem.

The principal application of this case is in a graduate auditing course that meets onceper week for three hours. This seminar course is a graduate accounting elective intended

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primarily for fifth-year Master of Accountancy students. The course is exclusively a casecourse in which 20–25 cases are covered during a 15-week semester. Students are requiredto have read the case before class and be prepared to respond orally to the case questionsif called upon.

Discussion of this case in the graduate auditing seminar was initiated by the instructorasking a randomly selected student to provide a brief oral summary of the case. Followingthis oral summary, other members of the class were asked to identify individual key factsof the case, which segued into a lengthy discussion of the major issues in the case. Oncethis discussion had concluded those issues in the case questions that had not been addressedwere briefly discussed. In total, approximately one hour and ten minutes of class time wasrequired to discuss the case—one hour of class time had been budgeted for coverage ofthe case.

Following the completion of the case, the graduate auditing students were given a briefanonymous questionnaire that asked them to identify the key strengths and weaknesses ofthe case, other information they believed should have been incorporated in the case, theiroverall impressions of the case, and anything else they wished to comment on regardingthe case. In terms of strengths, the students enjoyed the narrative nature of the case. Severalstudents mentioned that the historical information regarding Royal Ahold and the Heijnfamily made the case particularly interesting. The students also believed that the epiloguewas a strong feature of the case. In terms of weaknesses, more than one-half of the studentsindicated that there were too many case questions. In this same vein, a common criticismwas that one hour of class time was not sufficient to cover the case and the accompanyingquestions. Several students observed that the case should have concentrated more on therelevant auditing issues. Three students suggested adding financial statement exhibits tothe case. [Note: The original version of this case did not contain financial statement ex-hibits.] One student suggested breaking up the case into two separate case studies, onefocusing exclusively on accounting issues and the other focusing on auditing topics. Interms of the students’ overall impression of the case, each student enjoyed the case andbelieved it was a worthwhile use of class time. Five students indicated that additional caseswith an international aspect or angle should be incorporated in the course.

TEACHING NOTESTeaching Notes are available only to full-member subscribers to Issues in Accounting

Education through the American Accounting Association’s electronic publications systemat http: / /www.atypon-link.com/action/showPublisherJournals?code�AAA. Full-membersubscribers should use their personalized usernames and passwords for entry into the systemwhere the Teaching Notes can be reviewed and printed.

If you are a full member of AAA with a subscription to Issues in Accounting Educationand have any trouble accessing this material, then please contact the AAA headquartersoffice at [email protected] or (941) 921-7747.

REFERENCESBickerton, I. 2006. Four Ahold directors face court hearing in accounting scandal. Financial Times

(March 6): 28.de Boer, V. 2003. Ahold Fires CEO, CFO over inflated profit. Financial Post (February 25): FP12.de Jong, A., D. DeJong, G. Mertens, and P. Roosenboom. 2005. Royal Ahold: A failure of corporate

governance. Working paper, Eramus University, Rotterdam.Economist, The. 2003. Europe’s Enron. 366 (March 1): 55–56.

http://www.atypon-link.com/action/showPublisherJournals?code=AAA

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European Information Service. 2004. Auditing: Commission proposes tough new rules to restoremarket confidence. European Report (March 17): 1.

Kolk, A., and J. Pinske. 2006. Stakeholder mismanagement and corporate social responsibility crisis.European Management Journal 24 (February): 59–72.

Koster, P. 2004. Europe’s auditors should give us the bad news. Financial Times (January 19): 13.Plender, J. 2004. Problems at Ahold, Parmalat, and now Adecco raise new questions about how global

accounting firms work with multinationals. Financial Times (January 22): 15.Raghavan, A., A. Latour, and M. Schroeder. 2003. Questioning the books—A global journal report:

Ahold faces scrutiny over accounting. Wall Street Journal (February 26): A2.Royal Ahold. 2002. Code of Professional Conduct: The Basic Rules of the Game. Zaandaam, The

Netherlands: Royal Ahold.Securities and Exchange Commission (SEC). 2004a. Complaint in re SEC vs. Resnick, et al. Available

at: http: / /www.sec.gov.———. 2004b. Accounting and Auditing Enforcement Release No. 2124. Washington, D.C.: Gov-

ernment Printing Office.———. 2006. SEC rulemaking and other initiatives: Accommodations. Available at: http: / /www.

sec.gov.Sterling, T. 2006. Royal Ahold executives fined after conviction. Associated Press Online (May 22).

Available at: http: / /www.ap.org.Taub, S. 2005. SEC charges seven in Ahold fraud. CFO.com (November 3). Available at: http: / /

www.cfo.com.Walker, A. K. 2006. SEC faults KPMG audits. The Baltimore Sun (February 17): 1E.

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