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Royal Ahold (“Ahold”)
Ethical Issues
Ahold had a very corrupt tone at the top which was evidenced by the actions of their former top
executives who committed multiple acts of fraud within the company. With an unsuitable tone at
the top came pressures, incentives, and opportunities to deceive the public which was essentially
a product of Ahold’s lack of internal controls at the time. This case is an opportunity to review
the elements of the fraud triangle and discuss how auditors perform an audit and assess risk when
red flags exist that the financial statements may be materially misstated.
According to the rights theory, the shareholders, employees, investors, and general public had a
right to have fair statements issued. Ahold failed to fulfill this right along with their duty to
provide a true image of the company. Top executives were overriding certain controls put in
place in order to benefit themselves (stage 2 reasoning). They failed to look at the long term
effects of their actions as well as the consequences on the stakeholders; a harms versus benefits
analysis never did seem to be undertaken by Ahold management.
Ask students if Ahold had a stronger internal structure in place do you think some of these
fraudulent acts could have been prevented? The idea is to focus student attention on the fact that
even if the internal controls are strong, it does not mean fraud will be prevented since top
management can override the fraud or direct others to do so as occurred for Betty Vinson in the
WorldCom fraud.
Questions
1. In most cases in this book, the auditors have been taken to task by the courts for
failing to follow generally accepted auditing standards (GAAS) and violating their
ethical and professional responsibilities. The Royal Ahold case is different because
the court essentially found that Deloitte should not be held liable for the efforts of
the client to deprive the auditors of accurate information needed for the audit and
masking the true nature of other evidence. Still, the facts of the case do raise
questions about whether Deloitte compromised its ethical and professional
responsibilities in accepting evidence and explanations provided by the client for the
joint venture and promotional allowance transactions. Identify those instances and
explain why you believe ethical and professional standards may have been violated.
In the JV fraud, Deloitte advised Ahold on the consolidation of the joint ventures and revenue
consolidation of revenue under Dutch and U.S. GAAP. A memo explained that control of a joint
venture is required for consolidation of a venture’s revenues; control could be shown by a
majority of voting interest, a large minority in certain circumstances, or by a contractual
agreement. In 1999 to 2000, in response to Deloitte’s requests Ahold obtained “control letters”
countersigned by the joint ventures partners giving control to Ahold if consensus was reached by
the venture partners. In October 2002 Deloitte learned of a “side letter” contradicting the control
Because USF lacked an internal auditing department, Ahold hired Deloitte to perform internal
auditing services at USF, which reported to internal audit director of the company. In auditing the
PA and processes, a number of documents were requested from USF management, including the
vendor contracts. Management refused to produce a number of the requested documents. Several
members of management refused to meet with the internal auditor for exit meetings, so that
Deloitte, as external auditor, conducted PA confirmations to verify PA income. USF’s Chief
Marketing Officer had induced USF’s vendor to falsely report PA balances to income amounts
and receivables to the auditors and had concealed the existence of written contracts with USF
2. Evaluate the decisions made by Deloitte from an ethical reasoning perspective. Be
sure to consider the effects of its decisions on the stakeholders.
Deloitte had a duty and obligation of independence, objectivity, skepticism, due care, and
competence in conducting the audit. From a utilitarian perspective, the interests of all
Using rule-utilitarianism, GAAP and GAAS should be followed and interpretations made by
adhering to the spirit, not only the letter, of the rules. From a justice perspective, the audit
was biased towards the interests of the client. The way in which Ahold accounted for the JV
and promotional allowances lacked objectivity with an independent mindset required on all
3. A shareholder may file a securities fraud claim in federal court to recover damages
sustained as a result of a financial fraud. Before the PSLRA, plaintiffs could file a
lawsuit simply because the stock price changed significantly and hope that the
discovery process would reveal potential fraud. After the PSLRA, plaintiffs were
required to bring forth particular fraudulent statements made by the defendant, to
allege that the fraudulent statements were reckless or intentional and to prove that
they suffered a financial loss as a result of the alleged fraud. The Ahold case is an
example of how the courts have, sometimes, ruled more liberally with respect to
auditors’ legal obligations since the passage of PSLRA. In the wake of Enron,
WorldCom, Adelphia, and other high profile securities frauds, critics suggest that
the law made it too easy to escape liability for securities frauds and thus created a
climate in which frauds are more likely to occur. Comment on that statement with
respect to the fraud at Royal Ahold.
Prior to passage of the PSLRA that established a proportional liability standards (a party would
be held legally liable only for their portion of the fraud/loss), the joint and several liability
principle provided that each negligent party could be held liable for the total of damages
suffered, even though it was deemed responsible for only a small portion of the loss. One
There is no evidence have been less diligent since passage of the PSLRA. It would seem
unprofessional to approach difficult issues with a client in an audit of financial statements with
[An interesting paper by Kaplan and Williams on auditors’ role in securities lawsuits that can
Optional Question
4. Explain the legal liability of auditors under SEC regulations and the Tellabs ruling
relied on by the Court. Include in your discussion how scienter is determined. Do
you agree with the commission’s conclusion that the Deloitte auditors did not violate
their legal obligations to shareholders? Why or why not?
In Tellabs, in which the Court prescribed the following analysis for Rule 12(b)(6) motions to
dismiss Section 10(b) actions:
First, . . . courts must accept all factual allegations in the complaint as true . . . .
Second, courts must consider the complaint in its entirety . . . .
In order to establish a strong inference of scienter, plaintiffs must do more than merely
demonstrate that defendants should or could have done more. They must demonstrate that the
Deloitte auditors were either knowingly complicit in the fraud, or so reckless in their duties as to
be oblivious to malfeasance that was readily apparent. With respect to Ahold’s two frauds,
plaintiffs point to ways that defendants could have been more careful and perhaps discovered the
The SEC may bring civil and/or criminal cases against auditors under the Securities Act of
1933, the Securities and Exchange Act of 1934, the Private Securities Litigation Reform Act of
1995, and the Sarbanes-Oxley Act of 2002. These laws create potential civil liabilities for
Section 11 of the Securities Act of 1933 imposes a liability on issuer companies and others,
including auditors, for losses suffered by third parties when false or misleading information is
included in a registration statement. Any purchaser of securities may sue; the purchaser generally
The liability of auditors under the 1934 Act often centers on Section 10 and Rule 10b-5.
These provisions make it unlawful for a CPA to: (1) employ any device, scheme, or artifice to
The Private Securities Litigation Reform Act (PSLRA) of 1995 changed the potential liability
of accountants and other professionals in securities fraud cases. Among other things, the act
imposed a new statutory obligation on accountants. An auditor must use adequate procedures in
An accountant may be found criminally liable for violations of the Securities Acts of 1933 and
the Securities Exchange Act of 1934, the Internal Revenue Code, and state and federal criminal
codes. Under both the 1933 and 1934 Acts, accountants may be subject to criminal penalties for
willful violations – imprisonment of up to ten years and/or a fine of up to $10,000 under the
1933 Act and up to $100,000 under the 1934 Act. The Sarbanes-Oxley Act created new or
The Court found that, with perfect hindsight, the auditors could have required stronger
evidence of control for the joint ventures, designed a confirmation process that was not flawed,
been more careful and possibly discovered the frauds earlier; however, Ahold and USF went to
