The Securities and Exchange Commission (SEC) has revealed that it has charged The Kraft Heinz Company a civil penalty of $62m for engaging in a long-running expense management scheme that resulted in the restatement of several years of financial reporting.
The SEC also charged the company’s former COO Eduardo Pelleissone who consented to cease and desist from future violations, pay disgorgement and prejudgment interest of $14,211.31 and pay a civil penalty of $300,000.
In addition, the group’s former chief procurement officer Klaus Hofmann consented to paying a civil penalty of $100,000, and a final judgment permanently enjoining him from future violations, barring him from serving as an officer or director of a public company for five years.
According to the SEC’s order, from the last quarter of 2015 to the end of 2018, Kraft engaged in “various types 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 accounting improprieties resulted in Kraft reporting inflated adjusted “EBITDA,” a key earnings performance metric for investors. In June 2019, after the SEC investigation commenced, Kraft restated its financials, correcting a total of $208m in “improperly-recognized” cost savings arising out of nearly 300 transactions.
Gurbir S. Grewal, director of the division of enforcement, SEC, said: “Investors rely on public companies to be 100% truthful and accurate in their public statements, especially when it comes to their financials. When they fall short in this regard, we will hold them accountable.
“Today’s action demonstrates that no matter how complex and far-reaching the financial misconduct, we will vigorously pursue wrongdoers because that’s what investor protection requires.”
In response to the fine, Kathy Krenger, global chief communications officer for The Kraft Heinz Company stated that the group “fully cooperated” with the SEC throughout its investigation. She explained that the company took “prompt and extensive remedial” action and proactive steps to improve its internal policies, procedures, and internal controls over financial reporting.
She added: “The internal control weaknesses we identified and disclosed in 2019 were fully remediated in 2020. Kraft Heinz is much stronger today because of the actions we took and embedded into our company culture.”