Royal Ahold

1. Explain how Ahold used promotional allowances to manipulate earnings. Refer to the
fraud triangle described in this chapter and analyze the incentives, pressures, and
opportunities to commit fraud at Ahold.
Ahold recorded an inflated amount of the promotional allowances (including rebates,
discounts, program money, slotting fees, or vendor allowances which are fees paid to the vendors
in exchange for various marketing and promotional activities) in statement of income and
recognized revenue in advance. The reported revenue from USF was not from sales to customers.
Also promotional allowances combined with majority of the operating income. Majority of the
USF purchases are resulted from a vendor. According to the promotional allowance agreement,
USF would purchase a minimum volume from a vendor and then be paid a per-unit rebate of the
original sale amount to USF. Ahold would not have met its targeted amount if USFs operating
income would have materially decreased without using promotional allowances. Due to the
pressure on Ahold and USF for meeting the annual budget, they inflated operating income which
enhanced investor confidence and ultimately increased stock price. As we have studied one of
the factors of fraud element is opportunity which often arises due to weak internal controls in the
company. In the case, Ahold and USF considered weak internal controls as their opportunity to
increase the income on the financial statement which will make the financial statement better and
will give the positive signals to the market.

2. Use the COSO Integrated Framework and discussion of risk assessment in the chapter
and evaluate the deficiencies in the internal control system at Ahold. Include in your
discussion whether you believe Ahold adequately monitored its internal controls as
suggested in COSOs Guidance on Monitoring Internal Control Systems discussed earlier in
this chapter.
The corporate governance system had restricted influence over the companys business
operations which can be seen from the extracted facts of the case. Pressure and opportunity from
weak internal control created the incentives for manipulating the financial statement. The
corporate governance is responsible for transforming an inefficient company into effective,
efficient, and reliable company, which can only be possible if there is a separate department look
up for the financial reporting and report to non-executive committee such as internal audit team
or department. According to the case study, in USF does not seems to be an audited internally by
the company and had no comprehensive system for tracing amounts owed by vendors to the
promotional allowances. Instead, the promotional allowances were estimated based on a rate
computed by the company which led to the material overstatement of the operating income.
Furthermore, due to the absence of the internal control in the company the board at USF also
created bogus documents signed by the vendors which led the confirmation to the auditors for
the false amount from the vendors. Also in addition to the other internal weakness and nonmonitoring culture in the company USF was able make journal entries for reducing the accounts
payable balances which again presented the healthy picture of the financial statement. It is the
clear case of failure of tone at the top which emphasizes the vital crucial role of ethics.
3.) The court ruled that Deloitte was not responsible for the fraud at Ahold because its
management deceived the auditors and hid information from the firm. How does such

deception relate to the Deloitte auditors obligations to identify material misstatements in

the financial statements of Ahold and provide an opinion that the statements present fairly
financial position, results of operations, and changes in cash flows? Do you believe auditors
should be left off the hook with respect to their ethical and professional obligations because
of management deception?
The auditor should plan and perform the audit with an attitude of professional skepticism.
As the professional auditors had an obligation to plan and perform the audit to detect material
misstatements and assess the risk of fraud and gather evidence and corroborate the information
provided by the client in order to perform effective audit. The auditors should have perform
analytical procedures which is the initial step of the audit on the promotional allowance amounts,
trends over historic years, or compared to the industry averages or else it would have given clear
indication of drastic overstatement and also auditors were not even alarmed by rate of
confirmation from the vendors. Although, management misrepresented with the auditors and
might have conceal fraud which was hard to find. The auditors should have been able to find a
few indications of fraud within the companys books by comparing budgeted with actual
accounts.
4. In addition to the deficiencies in accounting for promotional allowances, Ahold engaged
in joint venture transactions that materially misstated the financial statements. Review the
litigation referred to in the case and describe the nature and scope of the joint venture
transactions and what problems existed with the companys accounting and financial
reporting and answer the following two questions.

a. Evaluate the operation of internal controls with respect to accounting for the joint
venture transactions. How might the company have strengthened its controls?
One of the complaints of SEC from Ahold Company was the improper consolidation of
joint ventures through fraudulent side letters despite of having interest in the joint venture less
than fifty percent (50%) of the voting right shares. As a justification of consolidation it is
mentioned the case study that Ahold try to conceal its fraudulent activity by providing side letters
to the independent auditors signed by Ahold and joint venture partners stating the rights to
consolidate the joint venture. It was the obligation of the auditors to get confirmation of side
letters from joint venture but it did not seem to be happened during the audit. The agreement was
signed by former partner of joint venture Roland Fahlin, member of supervisory board and audit
committee of Aholds company. The agreement with the joint venture should have been approved
by the board when they started receiving the received a report of reliance of the auditors on side
letters.
b. From a corporate governance perspective, what were the deficiencies that seem to have
contributed to the fraud in accounting for and reporting the joint venture transactions?
Can you identify corporate governance mechanisms that might have helped prevent or
detect the fraud at Ahold but that were nonexistent?
As discussed above internal controls seems to be absent or does not take into
consideration. Ahold required the strong audit committee governed by independent nonexecutive members which can fulfill corporate governance. As the work style of tone at the top
there should be a reward committee to assess and approve the performance bonuses and to

consider whether the incentive plan gives compensation for management to detect and blow the
whistle of fraud.