Could your company afford a $62 million fine by the Securities and Exchange Commission (SEC)? Not many could. In their recent settlement with the SEC, the Kraft Heinz Company (KHC) blamed their former procurement, finance, and accounting teams for inflating their financials and misleading investors. Only massive companies like the global food giant could absorb a $62 million settlement, but certainly their reputation will take a long term hit with investors, as well.
Other articles you might find helpful:
This is a case where human errors and fraud were not detected in time to save the KHC from lawsuits, fines, and the ensuing public relations disaster. We are going to break down this case, explaining what exactly KHC did wrong, and how the implementation of an Accounts Payable Invoice Automation (APIA) solution could have prevented this problem from escalating as far as it did.
What went wrong?
According to Anita Bandy, director of the SEC’s enforcement division, ”Kraft 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.”
From the end of 2015 through the end of 2018, KHC procurement employees negotiated agreements with suppliers to obtain upfront cash payments and discounts, in exchange for future commitments like contract extensions and volume purchases to be undertaken by KHC. Then KHC improperly documented the agreements in ways that prematurely and improperly recognized KHC's expense savings.
The SEC found that KHC's expense management practices “created the illusion of immediate cost savings through price decreases from suppliers, but, in reality, were structured to include an offsetting price increase later in time.”
In June 2019, after years of misleading transactions plus numerous other misstated accounting entries, KHC corrected its financial statements in its annual report filed with the SEC. KHC corrected a total of $208 million in cost savings arising from 295 transactions and also corrected its adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”), a key performance metric for investors.
How could this have been avoided?
Assuming the fraud perpetrated by KHC was limited to a few bad actors and the majority of staff and management at KHC are ethical employees, the right anti-fraud solutions could have prevented this mess. The three keys to effective anti-fraud solutions are:
- data integration
The right Accounts Payable Invoice Automation system provides all three. The increased access to well-documented, auditable data and comprehensive reporting are part of an overall strategy for reducing the risk of fraud. Key benefits of APIA include more accurate data capture, workflow automation, and improving controls and adherence to policy through a well-constructed approval matrix. All actions taken on individual payables are tracked and possess an easily accessible audit trail. Regular audits are essential to uncovering fraud, and automation provides quick and easy access to all of the documents and data needed for audits. Approvers and auditors have the ability to track invoices, note escalations, and run reports from all over the world, and even from their mobile devices. Given the right APIA automation tools, ethical employees within KHC could have noticed the pattern of “prebates” and discounts and started sounding the alarm.