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. Last Updated: 07/27/2016

Ahold Overstates Earnings by $500M

ZAANDAM, Netherlands -- Royal Ahold, the giant Dutch-based grocer and food distributor, said today that it had overstated its earnings by at least $500 million over the last two years. The company's chief executive and chief financial officer are resigning.

The problems at Ahold, whose American supermarkets, mostly in the Northeast, include the Stop & Shop, Bi-Lo, Giant and Tops chains, stunned investors, who bid the company's stock price down by more than 60 percent, wiping out more than $5 billion in market value. Stocks of companies with major stakes in Ahold, including Aegon, ING and Fortis, also fell sharply.

The accounting irregularities could draw scrutiny from the U.S. Securities & Exchange Commission, which is intent on restoring investor confidence in a market shaken by accounting scandals.

"If any company makes a restatement of earnings, the commission staff is going to look at it," said Herb Perone, a commission spokesman.

Although he declined to say if Ahold would be specifically targeted by the SEC, Perone told Reuters that an issuer of securities "listed in the U.S. falls under the jurisdiction of the SEC."

The Dutch grocer said its Columbia, Maryland-based U.S. Foodservice unit -- whose customers include restaurants, schools and hotels -- may have inflated operating profit by more than $500 million.

Ahold's accounting revelations led to an abrupt resignation of its chief executive and chief financial officer. Credit rating agency Standard & Poor's cut Ahold's long-term corporate credit rating to BB+, a level often referred to as "junk" grade. Other rating agencies either downgraded Ahold or said they were considering such a move.

Joseph Carcello, a professor of accounting at the University of Tennessee said "chances are somewhere between very good and overwhelming that the SEC will take a good look at the Ahold accounting issue."

He said the Ahold accounting revelations could serve as a crucial test case for European regulators who may have thought they were immune from corporate accounting irregularities.

"It's possible that the fact that Ahold is not American delayed what may have been disclosed much sooner," Carcello said.

One U.S. corporate accounting lawyer, who declined to be identified, said steps that the SEC may take in the event that investigations deem Ahold accounting to have been fraudulent, could include the censuring of top management.

Ahold said irregularities unearthed at U.S. Foodservice involved local managers booking far higher promotional allowances -- provided by suppliers to promote their goods -- than the company actually received in payment.

"These allowances were in some instances booked too high," said Henny de Ruiter, Ahold's chairman, in an interview. "We cannot tell you what happened precisely because we have not yet concluded the investigation."

Still, there was little sign that the company's accounting problems would have any immediate effect on the operation of Ahold's stores and other businesses. The company has about $1 billion in cash on hand, and is scheduled to repay about $1.5 billion in debts this year. The company said today that it would try to raise more cash by selling some operations and assets.

Ahold, which has operations in 25 countries, said it was also investigating possible irregularities at an Argentine subsidiary, Disco, and said that it would change the way it reported results from three other partly owned subsidiaries.

"This opens a whole new can of worms," said J?rgen Elfers, an analyst at Commerzbank Securities.

The new accounting problems came to light during an annual audit of the company by Deloitte Touche Tohmatsu, the accounting firm said today. Ahold said that the release of its 2002 results, scheduled for next week, would be postponed.

For years, Ahold was a darling of investors and the business press, especially in the Netherlands, because of its prolific deal making and its apparent sure touch in making cutthroat, low-margin businesses like grocery retailing and food distribution profitable. "Ahold was this magic growth machine," said Oscar Poos of Oyens & Van Eeghen, an Amsterdam brokerage house.

Cees van der Hoeven, Ahold's chief executive, had been particularly lauded for helping to transform a 116-year-old Dutch family grocer into one of the world's largest retailers, spending $19 billion over 10 years on a flock of acquisitions.

But analysts began to raise questions about Ahold's accounting after the company said in April 2002 that preparing its 2001 results under American rather than Dutch accounting rules would have slashed its reported earnings by 90 percent.

Van der Hoeven tried to soothe investors by promising to report results under both countries' rules quarterly, not just annually. But it became increasingly clear that the company would have trouble meeting its targets for 2002.

Some analysts have described Ahold as a paper chase, dependent on an increasingly heady pace of acquisitions to keep up earnings growth.

Much of Ahold's attention over the last decade was devoted to buying up supermarkets in the United States, including 64 stores from the bankrupt Grand Union chain, which are now part of its Stop & Shop subsidiary in the Northeast, and the Giant-Landover chain in the Washington-Baltimore area, making it the largest grocer on the East Coast. (NYT, Reuters)