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Supply Chain News: Former Kraft Heinz Chief Procurement Officer Fined in Scandal over Supplier Contracts

 

Company Played Shell Games Hoping to Realized Promised Cost Savings from Merger

 
Sept. 8, 2021
SCDigest Editorial Staff

Klaus Hofmann, chief purchasing officer at food giant Kraft Heinz Corporation before leaving in May 2020, “negligently approved and failed to prevent supplier contracts that masked the true nature of the transactions,” between July 2015 and September 2019, according to a court filing by the US Securities and Exchange Commission last week.

Supply Chain Digest Says...

The SEC’s complaint against Hofmann says he violated anti-fraud provisions, failed to provide accurate information to accountants and violated accounting controls.

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As a result, Hofmann has agreed to pay a fine of $100,000 over allegations he oversaw inflated cost savings as part of financial misreporting by the company.

More specifically, the SEC said Hoffman was responsible for a series of fraudulent transactions with suppliers. According to the UK’s SupplyManagement.com web site, those include:

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 obligations.


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 identified 59 such transactions took place, generated by procurement staff. It says that if they had been properly executed, Kraft Heinz’s cost of goods sold during the period would have been around $50 million higher than reported in its public financial statements.

SupplyManagement notes that when Kraft and Heinz merged in 2015 they forecast cost savings of $1.5 billion per year from various synergies realized from the merger.

The SEC filing said performance targets were set for procurement managers tied to savings realized through negotiations with suppliers.


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However, the SEC added that 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 unfavorable foreign exchange rates.”

Senior management “pushed procurement division employees to come up with ideas to generate additional immediate, same-year savings,” and thus the fraudulent transactions.

The SEC says, for example, In 2017 procurement personnel negotiated a $2million prebate to Kraft Heinz from a sugar supplier in exchange for a three-year contract extension and future sugar purchases. The agreement called for Kraft Heinz to return the $2 million 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,” the SEC said, while the company ““improperly recognized the full cost savings in August 2017.”

The SEC’s complaint against Hofmann says he violated anti-fraud provisions, failed to provide accurate information to accountants and violated accounting controls.

Hoffmann agreed to pay $100,000 and was barred from serving as director or officer of a public company for five years. The company’s former operating officer Eduardo Pelleissone was accused of similar violations and paid a $300,000 fine earlier

Kraft Heinz itself has agreed to a penalty of $62 million, without admitting or denying the findings.

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