Europe's Enron: Royal Ahold

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Europe’s Enron: Royal Ahold, N.V.

1. As shown in Exhibit 3, Royal Ahold decided to fully consolidate the company’s financial data into their financial statements. The problem was that they only held 50 percent ownership in these companies. Under Dutch GAAP, they were only supposed to consolidate the amounts equivalent to their ownership in those companies. They were able to include the entire amount of their partnership companies by persuading their auditors to allow them to do so. Instead of using the fully consolidated figures, Royal Ahold should have taken half of what they originally included. By incorporating these new figures using US GAAP, Royal Ahold’s net income decreases drastically. In 2001, net income drops from 1,113,521,000 Euros to 119,808,000 Euros, and in 2000, from 1,115,991,000 Euros down to 793,609,000 Euros. Royal Ahold, would have lost millions of dollars no whether it decided to use Dutch or US based GAAP. They chose to follow neither countries accounting rules when creating their financials. Although they succeeded for the time being, they were eventually caught, and much work has been done to try to turn around their tarnished reputation.

2. Earnings quality refers to the overall reasonableness of reported earnings. It is an assessment criterion for how repeatable, controllable and bankable a firm's earnings are. It recognizes the fact that the economic impact of a given transaction will vary across firms as a function of their fundamental business characteristics, and has variously been defined as the degree to which earnings reflect underlying economic effects, are better estimates of cash flows, are conservative, or are predictable. Just because the net income under US GAAP yields a smaller return does not necessarily mean that the numbers are of “higher quality”. Many steps and analysis g into the creation of net…...

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