Case- Evaluating an Ethical Dilemma: Management Incentives and Fraudulent Financial Statements

Netherlands-based Royal Ahold ranks among the world's three largest food retailers. In the United States it operates the Stop & Shop and Giant supermarket chains. Dutch and U.S regulators and prosecutors have brought criminal and civil charges against the company and its executives for overstating earning by more than $1 billion. The nature of the fraud is described in the following excerpt:

Two Former Execs of Ahold Subsidiary Plead Not Guilty to Fraud

28 July 2004 Associated Press Newswires © 2004. The Associated Press.

NEW YORK (AP)-Two former executives pleaded not guilty Wednesday to devising a scheme to inflate the earnings of U.S. Foodservice Inc., a subsidiary of Dutch supermarket giant Royal Ahold NV. Former chief financial officer Michael Resnick and former chief marketing officer Mark Kaiser entered their pleas in a Manhattan federal court, a day after prosecutors announced fraud and conspiracy charges against them.

The government contends they worked together to boost the company's earnings by $800 million from 2000 to 2003 by reporting fake rebates from suppliers-and sweetened their own bonuses in the process. Two other defendants have already pleaded guilty in the alleged scheme: Timothy Lee, a former executive vice president, and William Carter, a former vice president. Both are set for sentencing in January.

Netherlands-based Ahold s U.S. properties include the Stop & Shop and Giant supermarket chains. U.S. Foodservice is one of the largest distributors of food products in the country, providing to restaurants and cafeterias.

Ahold said last year it had overstated its earnings by more than $1 billion, mostly because of the fraud at U.S. Foodservice. Its stock lost 60 percent of its value, and about $6 billion in market value evaporated.

Required:

Using more recent news reports (The Wall Street Journal Index, Factiva, and Bloomberg Business News are good sources), answer the following questions.

1. Whom did the courts and regulatory authorities hold responsible for the misstated financial statements?

2. Did the company cooperate with investigations into the fraud? How did this affect the penalties imposed against the company?

3. How might executive compensation plans that tied bonuses to accounting earnings have motivated unethical conduct in this case?