VENDOR ALLOWANCES A THORNY INDUSTRY ISSUE

Mark Hamstra

ZANDAAM, Netherlands -- Retailers and wholesalers need to provide more information about accounting standards throughout their organizations in order to help prevent the kind of meltdown that is forcing Ahold to restate its earnings, according to some analysts polled by SN last week.

The company said its U.S. Foodservice subsidiary overstated its earnings by $500 million during the last two years because of inappropriate accounting for vendor allowances, an area that has proved particularly troublesome for retailers and wholesalers in the past year.

Kmart, Troy, Mich., and A&P, Montvale, N.J., both had to restate earnings because of improperly recognized vendor allowances, and the Securities and Exchange Commission currently is investigating two of the nation's largest food wholesalers -- Fleming Cos., Dallas, and Nash Finch Co., Minneapolis -- for, among other things, their accounting for money paid to them by vendors.

Some industry observers are concerned that Ahold's accounting problems may not be confined to its U.S. Foodservice subsidiary.

Richard Cotterill, director, Food Marketing Policy Center, University of Connecticut, Storrs, Conn., said studies of pricing policies at Ahold's Stop & Shop division indicate that the company has been very aggressive in seeking vendor allowances at that banner as well.

"What we found out is symptomatic of a broader management philosophy that holds in their supermarket division as well as in their U.S. Foodservice subsidiary," he said. "To the extent that we have a vote of 'no confidence' in their management philosophy at U.S. Foodservice, I don't see how you can have any confidence in their management philosophy at retail at this point."

He said companies need to have double-entry bookkeeping controls in place throughout the company so that "no one person can ever have the ability to hide anything."

Sharon Christians, senior vice president, corporate communications, Ahold, said the company has controls in place throughout the company, and she noted that the food-service operations are managed separately from the retail operations. She did not have information about the specific control procedures in place at U.S. Foodservice and the company's retail divisions.

Richard Hastings, economist, Vendor Compliance Federation, New York, an educational group that focuses on vendor-retailer issues, said he was not surprised at all by the size of the accounting discrepancy at Ahold.

"It reflects patterns of practice that have probably been in place at U.S. Foodservice for a while," he said. "Once you get down to the middle management level, they don't know anything about accounting principles. They are just executing, doing daily routines. As you go higher up in the organization in the accounting department, people know more about what's probably right and wrong."

Ronald Lunde, an industry consultant based in Ponte Vedra, Fla., said companies need to spend more time making sure the marketing and procurement people in their organizations understand the latest accounting regulations concerning vendor allowances, especially those recently issued by the Emerging Issues Task Force of the Financial Accounting Standards Board.

"Everyone in the industry should take the time to read those rules and regulations, and make sure that everybody in the organization -- not only accountants, but the buyers and merchandisers -- understands those rules," he said. "And I think they need to go back and do a review of their marketing strategies and their sales tactics and make sure that they are in compliance with these new ways of doing it. Otherwise you are going to wind up exactly like these guys wound up."

Some observers said the problems at U.S. Foodservice may not have been prevented by adhering to the new accounting rules, which only addressed the timing and classification of vendor allowances but did not address up-front payments made to retailers for a variety of merchandising and marketing services.

Larry Smith, chairman of the EITF, told SN last week that there were too many variations and subtleties in the way those funds are used for the EITF to issue firm guidelines about how to report them.

Hastings said he thinks issues related to vendor allowances will not be resolved until contract law is considered in tandem with the EITF discussions.