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U.S. Foodservice

U.S. Foodservice. What caused U.S. Foodservice to engage in questionable accounting practices? Were sales targets set too high by parent company, Ahold? Were the incentives offered to managers too enticing to resist?

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U.S. Foodservice

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  1. U.S. Foodservice • What caused U.S. Foodservice to engage in questionable accounting practices? • Were sales targets set too high by parent company, Ahold? • Were the incentives offered to managers too enticing to resist? • Was the firm’s board of directors lax in its oversight, and could this have contributed to the ethical lapse? • Why did ConAgra and Sara Lee react differently to this situation? • In January 2005 federal prosecutors charged nine former executives, including two who had worked for Tyson Foods and General Mills, w/ helping Ahold overstate earnings by more than $800m • Raises number of individuals charged in connection to alleged accounting fraud to 13, follows criminal charges brought in 2004 against four former ees of U.S. Foodservice

  2. “Feelings the Shivers of Faraway Scandals…” • Some businesses in Fort Wayne have seen firsthand how scandal can damage someone’s name • At Lopshire Flower Shop, seven of 10 brides used to ask for a ‘Martha Stewart look’ for flower arrangements – now they don’t mention her • Some Fort Wayne businesses have heightened focus on ethics • At Do It Best Corp, hardware cooperative, company’s new code of conduct tells Ees that if they see unethical behavior they must report it to mngt • Many businesspeople feel there are safeguards in Fort Wayne against dishonesty • In smaller business community, people who prove themselves to be cheats or thieves often identified quickly and ostracized

  3. “Feelings the Shivers of Faraway Scandals…” • President of Advantage Automotive Group (which provides Internet help to auto industry) is concerned that his kids don’t follow the rules when they play video games • Instead, they try to beat the game by using ‘cheat codes’ they find on Internet • Fears that kids today are getting message from big business that “people who create ways around the rules end up being rewarded” • Source: Wall Street Journal, 2/6/04 • Robert Jones, new president and CEO of Old National Bancorp, in speech to Evansville Rotary Club in January called for greater emphasis on business ethics in college to help combat ethical problems • “We must educate (students) on the real world, not what they see on ‘The Apprentice.’” • Source: Evansville Courier & Press, 1/12/05

  4. The meaning of ethics Ethics A conception of right and wrong conduct. Ethical Principles Guides to moral behavior. Ethical Relativism Holds that ethical principles are situational. Business Ethics The application of general ethical ideas to business behavior.

  5. Figure 5.2 Why should business be ethical? • To meet demands of business stakeholders. • To enhance business performance. • To comply with legal requirements. • To prevent or minimize harm. • To promote personal morality.

  6. Sarbanes-Oxley Act of 2002 • Firm’s audit committee entrusted with auditor oversight with all independent directors on committee. • Certain nonaudit services by auditors to clients banned, nonaudit services must be preapproved by audit committee, lead auditor must be rotated every five years, and auditors report to audit committee. • CEO and CFO must sign off on financial statements as accurate and fair and must repay bonuses if restatement of financials is undertaken.

  7. Sarbanes-Oxley Act of 2002 • Public Company Accounting Oversight Board established. • Firms not permitted to offer loans to executive officers or board of directors. • SEC rules will create guidelines for internal controls and financial reporting procedures, require adoption of or waiver for code of ethics for board, mandate financial expert must serve on board, and compel firm to state its financial condition in plain English on rapid or current basis. • ERISA penalties are increased from $5,000 -- $100,000 and one year in prison to $100,000 -- $500,000 and up to 10 years in prison.

  8. How Corrupt Is Wall Street? • Entire economy depends on financial system to raise and allocate capital. • “This is an industry of trust; it’s one of its key assets. If [Wall Street] loses it, it is going to have to invest in getting [that trust] back and putting in the controls to rebuild it. Without that trust, there’s nothing.” • Wall Street has always struggled with conflicts of interest – investment bank is built on them (sells stock, issues bonds, executes mergers for Cos; advises investors). • In recent years conflicts have grown worse, given money at stake. • And with deregulation in financial services, megabanks allowed to do more types of business. “Chinese walls” haven’t worked. • Firms increased employment, analyst compensation often tied to how much investment banking business they bring in. • And analysts need access to companies they’re analyzing to do their job well. • Experts say much corruption due to erosion in investment banking ethics and practices. • Reform needs to address compensation practices in addition to increased disclosure. • Source: Business Week, 5/13/02

  9. Audit Firms Face Heavy Fallout from Tax Business • KPMG and rival auditing firms pushed new, more complex generation of tax shelters in late 1990s • Often designed to create large paper losses used to erase unrelated taxable income • Used ‘derivative’ instruments, such as warrants, options, and swaps • Marketed with techniques usually associated with credit cards or home-equity loans • KPMG set up telemarketing center in Fort Wayne to make cold calls, hired veteran salespeople who worked on commission • Audit clients demanded lower prices, accounting firms expanded services in more profitable consulting work such as tax (fees as high as 15% of savings generated) • New accounting programs such as APS • Compared w/ potential profits, penalties for improper shelters relatively modest • E.g., on one product, $360k fees per particular shelter sold vs. $31k penalty per sale • “Competitors were calling our clients with ideas, and we weren’t”

  10. “Prosecutors Send a Message. Are Executives Listening?” • Do high-profile prosecutions actually discourage people from considering criminal acts? • If executives think they are unlikely to be caught, they may not be deterred • Certainty is more important aspect than severity • Source: New York Times, 3/14/04

  11. Audit Firms Face Heavy Fallout from Tax Business • Eventually, regulators caught up • IRS reached settlement w/ PricewaterhouseCoopers and Ernst & Young • KPMG under scrutiny, separate criminal investigation underway • GAO estimates ‘abusive tax shelters’ reduced tax revenues by some $12-15b annually 1993-99 • Some clients now suing accounting firms • KPMG has made major mngt changes, is taking more conservative approach re: tax strategies • Source: Wall Street Journal, 2/25/04

  12. USI Code: Definitions of Academic Dishonesty • “…requires each student to do his or her academic work without recourse to unauthorized means of any kind” • “Both students and faculty are expected to report violations of academic dishonesty” • “Faculty should explain the special hazards regarding academic honesty in their discipline” • “Faculty should also plan and supervise academic work carefully so honest effort will be encouraged”

  13. Figure 5.3 Why ethical problems occur in business

  14. “Opportunity for Corporate Fraud Has Shrunk – but It’s Still There” • Despite new laws and regulations, cos still face enormous pressure to meet short-term financial goals, creating powerful motive for accounting fraud • Businesses pay price for missing revenue targets by even a penny or two • No slowdown in race for higher CEO pay • “As long as CEO pay is so fundamentally out of whack, we cannot say that boards are doing their job or that corporate governance reform has been accomplished” • Greatest improvement since Sarbannes-Oxley was passed in 2002 has been in regulation of behavior of accountants • Corporate boards are meeting more often and paying more attention to work of auditors • Last year, longtime directors at American International Group overthrew Hank Greenberg as chairman after nearly 40 years at helm after regulators stepped up accounting probe at Co • However, opposition to some of changes made since Enron is growing • Source: Washington Post, 1/26/06

  15. Global Corruption

  16. “Multinational Companies Unite to Fight Bribery” • Some of world’s biggest construction, energy, and metals and mining companies, their industries beset by corruption investigations around globe, are starting to coalesce around plan to clean house themselves • Organizers concentrating on these industries because they frequently operate in developing countries and have some of biggest corruption problems • Signing onto “zero tolerance” pact against paying bribes being sponsored by coalition of groups working with World Economic Forum • Many big MNCs already claim to observe strict prohibitions against bribery and influence peddling, many have signed other pacts opposing corruption, so latest effort is bound to raise questions about its effectiveness • First such part organized by the businesses themselves • Main aim is to get all big players in key industries to sign deal so that they can work in unison, w/ feeling they are on level playing field, and monitor each other • Next step is to come up with enforcement structure, such as certification process by independent monitor • Source: Wall Street Journal, 1/27/05

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