Tight auditing of vendor co-op dollars and market development funds (MDFs) may become a headache for many manufacturers in the not-too-distant future because of fall-out of the Sarbanes-Oxley Act (SOX).
According to the upcoming cover story in Electrical Wholesaling, Section 404 of SOX, which goes into effect next month, requires public companies to scrutinize and audit their internal accounting like never before. Sloppy accounting of promotional allowances, vendor rebates and co-op funding are already attracting the interest of the Securities and Exchange Commission (SEC), even before Sarbanes-Oxley goes into effect.
Two cases in the food service industry should be of interest. Dutch grocery giant Ahold NV recently settled a case with the SEC over charges that Ahold “fraudulently inflated promotional allowances” at its U.S. Foodservice subsidiary, a large food distributor in the United States.
A recent The New York Times report said U.S. Foodservice was accused of overstating its earning in at least fiscal 2001 and 2002 by more than $800 million by booking revenue from promotional rebates from suppliers that had never been earned.
In another case of interest to manufacturers, distributors and reps, grocery wholesaler Fleming Companies Inc., Lewisville, Texas, allegedly overstated earnings in late 2001 and first-half 2002 by reporting fictitious transactions with suppliers to inflate its income. Fleming also allegedly bought excess inventory at the end of fiscal quarters to earn trade promotion cash rebates and volume discounts that improved the appearances of its finances.
Rob Hand, of Hand Promotion Inc., has been tracking Sarbanes-Oxley compliance as it applies to co-op funds and MDFs closely, and believes that manufacturers, distributors and reps cannot take this new law lightly. He believes private companies may one day soon have to disclose their accounting in these areas, too. For more information on the topic, check out his Web site at www.handpromotion.com.