Another well-known theory on this subject is the Routine Activities Perspective (RAP) forwarded by Cohen and Felson (1979) and it is stated that crime is largely possible when encouraged criminals get together with tempting targets in the absence of competent and efficient security measures. Ahold should obviously have implemented capable and effective security measures when they acquired USF.
USF bought from vendors and sold to hotels, schools, sport stadiums, restaurants etc. and gained a large part of its profits from promotional allowances and these were rebates from vendors for selling large volumes and for promoting the vendors products. No system was ever in place by the management to determine exact promotional allowances figures and USF stated no written contracts with suppliers were ever entered into regarding the discounts (SEC 2004). Money from suppliers under promotional allowances was credited to a separate account and only totals were then deducted from accrued receivables (SEC 2004). Deloitte during the audit in 2001 stated that the promotional allowances were to be kept on an individual account basis and that it was proving impossible in the audit to reconcile the individual accounts. Deloitte stated that USF management ignored their demands and carried on with the opaque system in-place and stated that it was not possible to reconcile outstanding claims with payments already received (SEC 2004).
For year end accounts USF was supposed to send out statements of account to suppliers setting out transactions and the amount payable by the supplier to USF but in reality only letters from USF to suppliers stating allowances due to USF were sent out. All confirmations of accounts were undertaken by the purchasing department of USF for Deloitte, thus breaking every principal on which independent auditing is based (SEC 2004). Complicating the issue was the fact that USF also had 15 different computer systems from its various acquisitions which it did not integrate and there were no uniform supplier codes anywhere so that when management from USF stated in 2002 that discussions with suppliers resulted in even better allowances and that operating income was higher it was nearly impossible to check this (SEC 2004).
In 2002 USF started buying large quantities of goods from suppliers and booked the promotional allowances before the goods were sold as they realised they were not going to achieve the 15 percent growth over 2001 sales that was group policy. The upper management in USF told all regions to buy large amounts of food thus receiving discounts that varied from 10 percent to 40 percent for USF and the USF employees were made to understand their very jobs were at stake if they did not comply with the instructions to buy huge quantities (Stecklow, Raghaven and Ball 2003). In February 2003 Deloitte advised that three confirmation letters were incorrect and the figures involved were very large ( Stecklow et al 2003). Deloitte advised Hoeven that the amount ran into several hundred million dollars and on 23 February 2003 Ahold announced that the earnings were over-inflated by 500 million dollars. A forensic audit showed that the sum involved for the years 2000, 2001 and 2002 was probably as high as 856 million dollars and gross accounting fabrications were being allowed inside USF ( Stecklow et al 2003). The management at USF were blamed for having a totally opaque accounting system, for failing to track the promotional allowances, for lying about the existence of fixed promotional allowance contracts to Deloitte and supplying false letters of agreement to suppliers stipulating to Deloitte the promotional allowances that were due
( Stecklow et al 2003). The times that Deloitte did send reports to Hoeven and Meurs, they were ignored.
Four upper management of USF were charged with fraud by the SEC as they gained huge bonuses for inflating the earnings of USF and one manager was charged with insider trading (Golden, Skalak and Clayton 2006). Hoeven and Meurs resigned in the wake of this disaster and there was a loss of 1.2 billion dollars announced for trading for just the year 2002 and Table 1 below shows the problems with the accounting in 2000 and 2001. Something that is clearly evident from the Ahold affair is that there should be standard international accounting principles for all international publicly listed companies and not a set of Dutch GAAP rules and then US GAAP rules for publicly traded companies as per the case of Ahold.
Table 1:
Accounting fraud: Dutch GAAP re-statements in 2000 and 2001 and Reconciliation of Dutch and US GAAP net earnings for Ahold
Dutch
GAAP US
Adjustments GAAP
Year Net
Earnings Goodwill Provisions Reorganization Joint Software Financing Other Net
ventures earnings
1991 125,159 -6,307 13,591 132,444
1992 138,422 -9,471 17,662 146,613
1993 155,698 -11,298 13,286 157,686
1994 185,842 -20,117 12,322 178,047
1995 207,187 -34,050 12,888 186,025
1996 286,982 -36,409 22,689 -36,712 -15,200 -4,300 13,033 230,084
1997 423,754 -100,647 43,330 -19,890 -31,585 314,961
1998 547,199 -96,095 -54,535 -7,378 8,335 397,526
1999 752,107 -147,378 -28,630 -19,202 10,109 6,473 573,479
2000 1,115,991 -300,266 -21,434 -1,143 -5,360 5,821 793,609
Restated 920,000 -289,000 -1,000 -57,000 -128,000 -64,000 61,000 442,000
2001 1,113,521 -728,210 -57,556 33,219 -5,360 -269,970 34,164 119,808
Restated 750,000 -214,000 33,000 -588,000 -30,000 -311,000 106,000 -254,000
2002 -1,208,000 -3,225,000 -26,000 119,000 117,000 -97,000 -8,000 -4,328,000
2003 -1,000 -398,000 14,000 -122,000 -133,000 -107,000 -747,000
Note: Table shows the reconciliation of Ahold’s net earnings in Dutch GAAP to US GAAP as originally filed with SEC and later restated in 2002 (in € thousands). (SEC 2004)
The collapse in the share price of Ahold is shown in table 2 below.
Table 2 ---Stock price of Ahold from 1995 to 2010 --Koninklijke Ahold NV ADR --- AHONY
Retrieved from on 20th November 2010
In March 2006 after a long investigation the courts in Holland found that Meurs was to bear the most blame for the accounting fraud and that Ahold was far too concerned with just achieving the double figure growth every year and although it was made aware of the incorrect controls inside USF when the Ahold bought USF, Ahold top management did not react because of a lack of understanding of the accounting methods and principles concerned (SEC 2004, Golden et al 2006).
The Differential Association Theory of Edwin Sutherland has had critics but it emphasizes two significant factors (Sutherland 1983). Criminal behaviour can be learned and is not related to biology or personality and “peers can be crucial models for the development of values and beliefs favourable to law violation” (Smith and Brame 1994 p. 610-611). Sutherland also explained that activity that is criminal is not restricted to the working classes or poor but is common in the so-called upper class and the clever and learned also (Sutherland 1983). While Sutherland was the initial person to invent the term “white- collar crime” the motivations for these crimes in the modern context seem to be much more complex and involve a number of theories.
General Strain Theory (GST) followed by Rational Choice (RCT) explains the motivation for the financial crimes of USF. Theories account for the creation of a pressure or pressure cooker atmosphere which converges in GST and then funnels down at a later stage to Rational Choice as pressure is put on management and executives of companies to keep performance and revenue increasing to meet market expectations and pressure is created and general strain exists (Dahlback 2003, Croall 2001, Coleman 1987). How well the management and executives cope with that pressure or strain will determine what occurs subsequently and in the case of USF they were faced with a rational choice, to follow the ethical path or commit a crime (Dahlback 2003, Croall 2001, Coleman 1987). The pressure cooker atmosphere caused by the management of USF resulted in the choice that the risks of the crime were calculated and deemed acceptable and in a society where the penalties for financial crime are lenient many will follow this path to err on the wrong side of the law. Society views white- collar crime differently and often regards it as victimless and this attitude toward white-collar crime is a distortion of our esteem for intellect and indeed the attitude of people towards white-collar crime may be contributing to incidences of financial crime (Stotland 1977 p.179-196). Interactionist Theory states financial crime is the result of individuals trying to live up to expectations of contemporaries and acquaintances and this is where the Interactionist Theory explains that the financial crime at USF may have been from pressure to conform to the economic and cultural expectations of the society we live in. Agnew (1992 p. 47-87) identifies a number of strains persons experience in working life and states that an incapacity to lawfully attain a wanted financial accomplishment is a significant sort of strain. Many upper classes and middle classes in the U.S.A. want more wealth than they can achieve through lawful means and this may explain the cause of what happened at USF (Agnew 2001 p. 162).
In conclusion, because Ahold co-operated with the SEC in the USA, disclosed all the accounting fraud and removed all the management who had caused the problems and thereafter fixed internal controls and accounting procedures and implemented proper corporate governance the SEC did not levy any fines (SEC 2004). Ahold should have implemented these reforms when they bought USF. The Dutch court found Hoeven and Meurs did not act because of greed but because they lacked a proper understanding of accounting procedures and little understanding of promotional allowances. The corporate governance structure that was finally implemented was based on the principals in table 3 below.
Table 3: OECD principles of corporate governance most of which were totally ignored by the Ahold management prior to 2002
Corporate governance should protect shareholder rights
Basic shareholder rights include the right to elect members of the board
Shareholders have the right to participate in decisions concerning fundamental corporate change ((amendments to governance, authorization of shares, sale of the company)
Shareholders vote in general shareholder meetings (whether this is in person or in absentia)
Capital structures and arrangements that give certain shareholders a disproportionate degree of control should be disclosed
Market for corporate control should be allowed to function without anti-takeover devices
Shareholders, including institutional investors, should consider the costs and benefits of their votes
Corporate governance should ensure equitable protection of all shareholders, including minority and foreign shareholders
Corporate governance should recognize the rights of stakeholders as established by law and encourage the active co-operation between the corporation and stakeholders
Corporate governance should ensure that timely and accurate disclosure is made on all matters regarding the corporation (including financial, performance, ownership and governance)
Corporate governance should ensure the strategic guidance of the company, the effective monitoring of the management by the board, and the board’s accountability to the company and shareholders
Board should act on a fully informed basis with due diligence and in the best interest of the
company and shareholders
Board should treat all shareholders equally
Board should ensure compliance with the law
Board should fulfill certain key functions, including
- Reviewing and guiding corporate strategy; setting performance standards; monitoring
implementation and corporate performance; overseeing major capital expenditures,
acquisitions and divestures
- Selecting, compensating, monitoring and when necessary, replacing key executives and
overseeing succession plans
- Reviewing key executive and board remuneration, and ensuring a formal and
transparent board nomination process
- Monitoring and managing potential conflicts of interest of management, board
members and shareholders
- Ensuring the integrity of the corporation’s accounting and financial reporting systems
- Monitoring the effectiveness of its corporate governance practices
- Overseeing the process of disclosure and communication
Board should exercise objective judgment on corporate affairs independent, in particular, from
management
- Board should consider assigning non-executive members to tasks where there is the
potential for conflict of interest
- Board should devote sufficient time to their responsibilities
Board should have access to accurate, relevant and timely information
Note: Table above is based upon a summary of the Organization for Economic Co-operation and Development’s (OECD) Principles of Corporate Governance authored by the Ad Hoc Task Force on Corporate Governance in 1999.
References
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Agnew, R. (2001) An overview of general strain theory Pp. 161-174 in Explaining Criminals and Crime. Edited by Paternoster, R. and Bachman, R. Los Angeles: Roxbury Publishing Company.
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Coleman, J. (1987) Toward an Integrated Theory of White Collar Crime. The American Journal of Sociology, 93, (2).
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Encyclopædia Britannica (2010) Harper Collins Publishers, 10 East 53rd Street, New York,
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