Quotes of the Day

In Amsterdam, they're calling it "Enron on the Zaan," referring to the river that flows near the headquarters of Royal Ahold, the world's largest food retailer. And while that might be an exaggeration, Ahold has certainly scandalized the Netherlands' normally placid business life. The company's CEO, Cees van der Hoeven, and its finance chief, Michael Meurs, abruptly resigned last week following the discovery that a food-service subsidiary in the U.S. had overstated its operating earnings by at least $500 million. Ahold's stock immediately plunged by two-thirds, erasing €5 billion in value, although it picked up again slightly at the end of the week. Meanwhile, Dutch regulators, the Securities and Exchange Commission in Washington and the U.S. attorney's office in Manhattan started official investigations, and shareholder class-action suits have already been filed in the U.S.

How could this happen to the worldwide giant that, after all, owns Giant and Stop & Shop in the U.S. and 7,000 stores in Europe, including Supersol and Hipersol in Spain and ICA throughout Scandinavia? In some respects, the company is a victim of its own reach. Van der Hoeven, 55, is a tall, heavy-smoking former Shell executive with a commanding manner. When he took over as CEO in 1993, he promptly launched an international acquisition binge that turned the once family-owned firm into a colossus with 35 companies spread over four continents and sales in 2002 the company puts at more than €70 billion. "He's been exemplary," says David Pinto, editor of a trade magazine that made Van der Hoeven its Retailer of the Year for 2001.

But he also loaded Ahold with more than €12 billion of debt. And for investors and stock-market analysts, the company has become an example of something else: muddy accounting. One of the most jarring discrepancies emerged a year ago, when Ahold published its annual results. The European version showed profits of over €1 billion. But the U.S. version, under American accounting rules, showed net income was just €120 million — almost 90% less. However tempting the Enron comparison may be, no allegations have so far emerged of massive and systemic fraud by top management; instead, the two men may have resigned to take responsibility for their lack of oversight. At the heart of the problems at the U.S. food-service operation are "promotional allowances," a standard industry practice whereby food companies pay retailers and caterers (like Ahold's subsidiary) to ensure their products get precedence over those of their competitors'. Henny de Ruiter, the chairman of the supervisory board, said the U.S. food-service subsidiary appeared to have booked these payments before they had been earned. He stressed that similar abuses hadn't been found at the company's core operations.

Marco Becht, executive director of the European Corporate Governance Institute (ECGI) in Brussels, says that companies tolerate accounting problems less than they used to, and that the ousting of the two executives "may be a case of old-fashioned European corporate governance that bites."

Maybe, but the case underscores some troubling issues about European corporate accounting. Ahold long had a reputation for being hard to read. Enitan Adebonojo, of the Center for Financial Research and Analysis, a U.S. firm that specializes in identifying companies that use aggressive accounting to mask operational problems, says Ahold used proceeds from real estate sales and leasebacks to boost its numbers in Europe, a technique not allowed in the U.S. She also says she had some tough questions for Ahold about its cash flow, but received only vague answers. "There was no way to see the true picture," she says.

Some of these ambiguities and discrepancies are supposed to disappear over the next two years as European companies switch to new international accounting standards that are closer to the U.S. rules. But the changeover could sow more confusion. At Bouygues, a French construction and telecommunications company, for example, finance chief Olivier Poupart-Lafarge says he expects managers will return to using two sets of books: one for external investors and regulators who use the new standards, and another for internal use by managers who prefer the old system. For Ahold, it's not just a question of more rigorous accounting. More immediately, even as the company seeks to get to the bottom of the scandal, it needs to keep its creditors at bay.

• PETER GUMBEL
• Is something wrong with Europe's accounting rules?