Kraft Heinz Company and Former Executives Charged for Accounting Misconduct, KHC to Pay $62M

The food and beverage manufacturing company and its former COO Eduardo Pelleissone and Chief Procurement Officer Klaus Hofmann are in trouble with the Securities and Exchange Commission (SEC) for their alleged participation in an expense management scheme. According to Friday’s complaint against Hofmann, the misconduct resulted in The Kraft Heinz Company (KHC) reporting inflated earnings before interest, taxes, depreciation and amortization (EBITDA), a critical performance metric. 

The order concerning KHC and Pelleissone asserts that from the last quarter of 2015 through 2018, KHC committed various forms of accounting misconduct, “including recognizing unearned discounts from suppliers and maintaining false and misleading supplier contracts, which improperly reduced the company’s cost of goods sold and allegedly achieved ‘cost savings.’” The resulting, inaccurate EBITDA was in turn reported to financial analysts and investors.

Once the SEC commenced its investigation in June 2019, KHC corrected its financials via restatements. The company revised $208 million in improperly-recognized cost savings arising from close to 300 transactions. For example, in 2017, KHC misreported reduced costs of $600,000 through a price phasing deal with a sugar supplier. The transaction produced no real savings, however, because it required KHC to later remit the same amount to the supplier in the latter quarters of that year.

The order and Southern District of New York complaint explain that KHC did not have effective internal accounting controls for its procurement division. Consequently, “finance and gatekeeping personnel repeatedly overlooked indications that expenses were being improperly accounted for,” the SEC’s press release says.

As to Pelleissone, the COO reportedly failed to acknowledge numerous warning signs that expenses were being managed through tampered supplier agreements. Rather than confronting these red flags, Pelleissone allegedly drove the procurement division to meet unrealistic savings targets.

For his part, Hofmann reportedly approved several supplier contracts, “despite numerous warning signs that procurement division employees were circumventing internal controls, and certified the accuracy and completeness of the procurement division’s financial statements when the misconduct was occurring.” Pelleissone, member of KHC’s disclosure committee then improperly approved the company’s financial statements, according to the SEC.

KHC has agreed, without admitting or denying the truth of the SEC’s findings, to pay a civil penalty of $62 million, while Pelleisone will pay $300,000 in addition to disgorgement plus interest. Hofmann has reportedly consented to a final judgment, subject to judicial approval, ordering him to pay a civil penalty of $100,000 and barring him from serving as a public company’s officer or director for five years.