The former CPO at Kraft Heinz Company (KHC) has agreed to pay $100,000 over allegations he oversaw inflated cost savings as part of financial misreporting by the company.
In a court filing the US Securities and Exchange Commission (SEC) said Klaus Hofmann, CPO and global head of procurement at KHC between July 2015 and September 2019 before leaving in May 2020, “negligently approved and failed to prevent supplier contracts that masked the true nature of the transactions”.
The SEC said these transactions included:
• Prebate transactions – where vendors provided discounts and credits in exchange for contract extensions and future-year volume purchases, which were falsely stated as savings for past or same-year purchases;
• Clawback transactions – where procurement employees took upfront payments from vendors subject to repayment through future price increases or volume commitments, but documented in ways that obscured the repayment obligation, and;
• Price phasing transactions – suppliers agreed to reduce prices during a certain period in exchange for an offsetting price rise in a future period, but the full nature of the arrangement was not communicated.
The SEC said around 59 such transactions took place, generated by procurement staff, and had they been properly documented and accounted for, KHC’s cost of goods sold during the period would have been around $50m higher than reported in public financial statements.
When Kraft and Heinz merged in 2015 they said the deal would deliver cost savings of $1.5bn a year. The SEC said performance targets were set for procurement employees tied to savings realised through negotiations with suppliers.
However, by 2017 the “procurement division had largely exhausted its ability to extract synergies from the merger” and costs for ingredients and packaging increased due to inflation and unfavourable foreign exchange rates.
Senior management “pushed procurement division employees to come up with ideas to generate additional immediate, same-year savings”.
“In 2017, for example, procurement division employees negotiated a $2m prebate to KHC from a sugar supplier in exchange for a three-year contract extension and future sugar purchases,” said the SEC. “In addition, the agreement called for KHC to return the $2m back to the supplier in the form of paying higher prices for sugar over the three-year period. Thus, the agreement did not produce any actual cost savings.”
However, KHC “improperly recognised the full cost savings in August 2017”.
The SEC’s complaint against Hofmanm, who featured on the CIPS Procurement Power List in 2018, alleged he violated anti-fraud provisions, failed to provide accurate information to accountants and violated accounting controls.
KHC’s former chief operating officer Eduardo Pelleissone was accused of the same violations. Rather than addressing risks after being made aware of issues, “he pressured the procurement division to deliver unrealistic savings targets”.
Without admitting or denying the allegations, Pelleissone agreed to pay a civil penalty of $300,000. Similarly, Hofmann agreed to pay $100,000 and was barred from serving as director or officer of a public company for five years. KHC has agreed to a penalty of $62m, also without admitting or denying the findings.
In June 2019, after the SEC investigation commenced, KHC restated its financials, correcting a total of $208m in improperly-recognised cost savings arising out of nearly 300 transactions, said the SEC.
“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. The violations harmed investors who ultimately bore the costs and burdens of a restatement and delayed financial reporting,” said Anita Bandy, associate director of the SEC’s Division of Enforcement.
“Kraft and its former executives are being held accountable for placing the pursuit of cost savings above compliance with the law.”
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