Case Study Analysis of Royal Ahold Scandal

7061 Words Oct 14th, 2008 29 Pages
Final exam assignment

Introduction
Over the last few decades there have been a number of cases of high profile corporate collapses and fraud scandals. In essence, the unethical behaviour of corporations affects us all, such as shareholders’ lost financial investments, employees who lost their jobs, other companies that provided goods and services to the company, as well as the economic impact on domestic and international communities. In this paper I will focus on the case study of Royal Ahold and the large accounting fraud that took place within the company. The issues I will address include Ahold’s transparency and disclosure weaknesses, its demanding culture focused on economic growth regardless of certain ethical principles, the
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It also includes voluntary communications such as management forecasts, analyst presentations, press releases, corporate websites and many more (Solomon, 2007 ). By committing fraud, the information presented in the annual report, was clearly not giving a ‘true and fair’ view of the company’s actual status. The voluntary information disclosed by Ahold was also affected by its fraudulent activity. Market analysts could for example not analyse the company according to its real potential, seeing that the information disclosed was not living up to reality.
Thus, agency theory claims that there exists an information asymmetry between management and owners (or potential owners), as managers are far more knowledgeable about the company’s activities and economic condition than its owners. Financial reporting is one way of reducing information asymmetry, as it helps investors to make better informed decisions (Solomon, 2007 ). I will now take a bit more detailed look at how Ahold was able to disclose the wrong information, leading to a serious lack in transparency in the firm.
Ahold’s strategic move into food services is seen as the instigator to a long line of accounting irregularities. US Foodservices (USF) received a large number of promotional allowances, if it purchased a large volume of merchandise. The problem was that managers systematically manipulated the books in order to…