The Kraft Heinz Company has agreed to pay US$62 million for failing to design and maintain effective internal accounting controls for its procurement division between the last quarter of 2015 to the end of 2018. This led to the company incorrectly claiming cost savings of US$280 million during the period, the US Securities and Exchange Commission (SEC) said. Kraft Heinz neither admitted nor denied SEC's findings, the commission said.
The SEC said last week that it is charging the company with engaging in a long-running expense management scheme that resulted in the restatement of several years of financial reporting. Over a period of three years, Kraft Heinz was alleged by the SEC to have engaged in various types of accounting misconduct, including recognising unearned discounts from suppliers and maintaining false and misleading supplier contracts, which improperly reduced the company's cost of goods sold and allegedly achieved cost savings.
Kraft Heinz, in turn, touted these purported savings to the market, which were widely covered by financial analysts. The accounting improprieties resulted in Kraft Heinz reporting inflated adjusted earnings before interest, taxes, depreciation, and amortisation, which the SEC said is a key earnings performance metric for investors. Former COO Eduardo Pelleissone was presented with "numerous warning signs" that expenses were being managed through manipulated agreements with Kraft Heinz's suppliers. Instead of addressing these risks, he pressured the procurement division to deliver unrealistic savings targets, the SEC said.
Former chief procurement officer Klaus Hofmann then approved several improper supplier contracts despite warning signs that procurement division employees were circumventing internal controls. He then certified the accuracy and completeness of the procurement division's financial statements when the misconduct was occurring. As a member of Kraft Heinz's disclosure committee, Pelleissone then improperly approved the company's financial statements.
Pelleissone has agreed to pay a civil penalty of US$300,000 and disgorgement and prejudgment interest of US$14,211.31. Meanwhile, Hofmann agreed to pay US$100,000 and has been barred from serving as an officer or director of a public company for five years. MARKETING-INTERACTIVE has reached out to Kraft Heinz for comment.
"Kraft Heinz and its former executives are charged with engaging in improper expense management practices that spanned many years and involved numerous misleading transactions, millions in bogus cost savings, and a pervasive breakdown in accounting controls," said associate director of the SEC's division of enforcement, Anita B. Bandy. She then added that these violations harmed investors who had to bear the costs and burdens of a restatement and delayed financial reporting.
Photo courtesy: 123RF
Power up your PR and communications efforts today with MARKETING-INTERACTIVE's PR Asia Week on 1 and 2 December. Learn ways to build an evidence-based practice, up the ante on your strategies, and be head and shoulders above your competition. Click here to register today!
Kraft Heinz asked to withdraw 'misguided negative campaign' on palm oil
Kraft Heinz Indonesia wraps up creative pitch
Poh Heng Jewellery fined SG$9,000 for transaction linked to SkillsFuture scam