Kraft Heinz has admitted staff in its procurement department “engaged in misconduct” in relation to how financial arrangements with suppliers were reported.
In a filing to the US Securities and Exchange Commission (SEC), Kraft Heinz said an internal investigation found “misstatements” relating to “incorrect timing of when certain cost and rebate elements associated with complex supplier contracts and arrangements were recognised”.
As a result of its internal investigation, Kraft Heinz said it identified total required adjustments to the cost of goods sold of around $208m.
“The impact of these corrections to previously reported financial statements is an increase to cost of products sold of approximately $25 million in 2015, $26 million in 2016 and $100 million in 2017.”
The company said once corrected for, it expects to “recognise corresponding decreases to costs of products sold in future financial periods”.
“As a result of the findings from the company’s investigation, which identified that several employees in the procurement area engaged in misconduct, the company has recorded adjustments to correct prior period misstatements that increase the total cost of products sold in prior financial periods, which the company does not believe constitute a quantitatively material misstatement to any individual period,” said Kraft Heinz.
“The findings from the investigation did not identify any misconduct by any member of the senior management team. Additionally, the company has implemented and continues to implement certain remedial actions, including employee personnel actions and certain improvements to its internal controls, to mitigate the likelihood of this occurring in the future.”
The SEC is currently investigating Kraft Heinz’s procurement function and the company said it could not predict the “eventual scope, duration or outcome of any potential SEC investigation”.
The company said it had reviewed significant supplier contracts to “identify other potential misstatements in the timing of the recognition of supplier rebates, incentive payments, and pricing arrangements”.
“The review identified additional misstatements, which may or may not have resulted from the misconduct noted above, primarily related to certain supplier contracts and arrangements where the allocation of value of all or a portion of rebates and up-front payments to contractual elements in the current period should have been deferred and recognized over an applicable contractual period,” said Kraft Heinz.
Simon Whatson, a principal at consultants Efficio, said: “This underlines the importance of putting in place commercial agreements with suppliers that are understandable to those in the business who use them, otherwise value will not be realised.
“A commercial construct can be academically sound without being properly implementable. This obviously includes being able to articulate the financial impact of a deal to the finance team in a way that allows them to account for the value correctly in company reporting.”
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