Europe'sEnron

TheAholdfinancialscandalshouldshockEuropeinto
accountingandcorporategovernancereform,justastheEnron
scandaldidAmerica
ITMAYseemanexaggerationtodescribethescandaloverwhelmingRoyalAholdasEurope's
Enronbutinmostofthewaysthatmatteritistrueenough.Certainly,theworld'sthirdbiggestfood
retailer,afterWalMartandCarrefour,posesnoneofthesystemicfinancialrisksofEnron,whichwas
bothdeeplyindebtandtheworld'smainelectricitymarketmaker.Thatapart,thesimilaritiesbetween
theformerTexanpowerhouseandtheDutchretailerarestriking,fromvainyetsecretivebossesto
thewoefulcorporategovernance,aggressiveearningsmanagementandaccountingirregularities
toauditorswhowere,atbest,asleeponthejob.
Now,atleast,EuropeansshouldstopsmuglybelievingthatcorporatemalfeasanceisanAmerican
vicethatcannotoccurintheoldcontinent.Instead,theyshouldfixtheircorporategovernanceand
accountingproblemswithasmuchvigourastheirAmericancousinsshowedaftertheEnronwakeup
call.
OnFebruary24th,Aholdannouncedtheresignationofitschiefexecutiveandfinancedirectorafter
findingthatithadoverstateditsprofitsbymorethan$500m(euro463m)inthepasttwoyears.Its
marketvalueplungedby63%thatday,toeuro3.3billion.Inlate2001,itexceededeuro30billion.
Aholdisnowunderinvestigationbyvariousauthorities,includingAmerica'sSecuritiesandExchange
Commission(SEC).
ThisdwarfspreviousaccountingscandalsincontinentalEuropethoseatComroadandEM.TVof
Germany,andBelgium'sLernout&Hauspie,say,weretinyandmostlyinvolvedyoungerfirms.Ahold
is115yearsold,withsalesestimated(beforethescandal)ateuro77billionin2002.
RatherlikeKennethLayatEnron,andDennisKozlowskiatTyco,anotherscandalhitAmericanfirm,
Ahold'snowdepartingboss,CeesvanderHoeven,wonaformidablereputationfromturningadull
companyintoagrowthmachine.Investorsapplaudedlongaftertheyshouldhavestartedaskinghard
questions.Wheneventuallytheydidaskthem,hescornedthemfordaringtodoubthim.EricTibiof
UBSWarburgcallsthedefensiveresponseofAhold'sbossestoprobingquestionsincrediblean
attempttofrightenus.

Foodforthought
Ifthereisnoevidencethathewaspaidoutlandishlystilllessthathelootedthefirm,assome
AmericanbossesareallegedtohavedoneMrvanderHoevencertainlybecameaddictedtohis
reputationasaninfalliblecorporatetitan.Hehasboughtsome50firmsforatotalofeuro19billion

since1993,andnotchedup23quartersofdoubledigitprofitgrowthinarowbutwhengrowth
slowed,heseemstohavebeenunabletoadmittoAhold'struecondition.LikemanyAmericanfirms
duringthebubbleyears,Aholdstartedtobendtheaccountingrules,claimingprofitsofacquiredfirms
asorganicgrowth,bookingcapitalgainsfromsaleandleasebackdealsasprofit,andkeeping
billionsindebtoffitsbalancesheet.
Thesetechniques,thoughnotillegal,shouldhaverunginvestors'alarmbells,justasEnron'suseof
offbalancesheetvehiclesshouldhavedone.Indeed,someobserversweredisturbedbythem.In
June2001,theCentreforFinancialResearch&AnalysisinMarylandpublishedthefirstofsixreports
detailingquestionableaccountingatAhold,goingbackto1999.EnitanAdebonojo,anauthorofthe
reports,arguesthatsuchuseofsmokeandmirrorssuggeststhattheaccountingproblemsatAhold
arefardeeperthanthoserevealedthisweek.MostobserverssuspectthatAholdhasmorebadnews
toreveal.
ByFebruary2002manyanalystswerequestioningthefirm'snumbers
Althoughthisweek'splungingsharepricesuggeststhatinvestorsweresurprisedbyAhold's
accountingwoes,byFebruary2002manyanalystswerequestioningthefirm'snumbers.YetMrvan
derHoevencontinuedtoassertformuchof2002thatitwasoncoursefordoubledigitprofitgrowth
promisesthatmaynowformthebasisofclassactionlawsuits.
The$500moverstatementisdueprimarilytoAhold'sUSFoodserviceunit,whichsuppliesfoodto
schools,hospitalsandrestaurantsalthoughtherearealsoissuesoveritsDiscosubsidiaryin
Argentinaandseveralotherunits.ThishasledsomeobserverstosaythatthisislessaEuropean
problemthanyetanotherAmericanaccountingfailure.SuchanoutlandishclaimabsolvesAhold's
bossesofresponsibilityfortheiracquisitionsandignoresthepersistent,firmwidetendencytotest
thelimitsofacceptableaccounting.
MostfirmsthatbuyinbulkincludingsuchadmiredretailersasWalMartandTescogetdiscounts
fromsuppliersiftheymeetsalestargets.Theissueishowthoserebatesareaccountedfor.The
prudentpracticeistowaituntilthetargetsaremet.Failingfirms,suchasnowbankruptKmart,
Fleming,afooddistributor,andnowAholdappeartohavebookedthesepaymentsbeforetheywere
earned.Aholdmayevenhavebookedentirerebatesasprofitinthefirstyearofmultiyear
agreementsorsimplymadethemup.
ThescandalshoulddispelclaimsaboutthesupposedinherentsuperiorityofcontinentalEurope's
twotierboardsoverAngloSaxonunitaryboards.Ahold'ssupervisoryboardwasatleastas
dominatedbyMrvanderHoevenasanyAmericanboardwasbyitschiefexecutive.Andifnobody
shouldbesurprisedatlaxaccountingoversightintheNetherlands,whatofDeloitte&Touche,Ahold's
auditor?AlthoughDeloitteuncoveredtheproblemsinthepastfewweeks,itshouldhavedoneso
muchearlier,saysLynnTurner,aformerchiefaccountantattheSEC.Thetruthmaynotbeclearfor
sometime.Norwillhowmuchtopmanagementknewaquestionthatremainsunansweredfor
manyoftherecentAmericanscandals,includingEnron.AskedifAholdanditssuppliersmighthave
collaboratedtoconcealthetruth,Deloittesaysonlythatwewouldliketoknowtheanswertothat
too.

Havingwiselynegotiatedaneweuro3.1billioncreditlinewithfivebanksovertheweekend,before
publicisingitsaccountingproblems,Ahold'sshorttermliquiditylooksassured,despiteadowngrade
tojunkstatusbyStandard&Poor's.Butwithnetdebtofatleasteuro13billionandamarketvalue
lessthaneuro3billion,itwillhavetorenegotiateitsborrowingssoon.Thereiseverychancethatitwill
havetobreakitselfup.Onethingatleastseemscertain:longafterthecorporatevultureshave
finishedfightingoverAhold'sbones,thereverberationsofEurope'sEnronwillbefeltbyalltheold
continent'scompanies.