“h.J. Heinz Company: The Administration of Policy” Case Analysis Summary

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-In April 1980 Doyle Dane Bernbach, the only publicly held firm among the advertising and consulting firms included in the Audit Committee’s investigation, admitted in an SEC filing that it had participated in the income juggling practices by pre billing and issuing bills that did not accurately describe the services provided.

-The two major areas of impropriety were: Improper recognition of expenses, Improper recognition of sales

-The Audit Committee indicated that these income transferal practices were designed to adjust the income reported by divisions to corporate headquarters and were motivated primarily by a desire to meet the constantly increasing profit objectives set by world headquarters

-Management incentive program (MIP) under which the goals were administered created significant pressures

-The MIP goal pressures provided the incentive, and autonomous control the opportunity, for adopting the improper practices being reported.

-Beginning in FY 1977, additional income transfer methods were developed. Distribution centers were instructed to stop shipments for the last few days of the fiscal year to allow the recording of sales in the subsequent year.

-Vendors’ credits were often deferred and processed in the subsequent fiscal year to assist the income management program.

-Vendor cooperation was not difficult to obtain. One Heinz manager described it as “the price of doing business with us.”

-Ore-Ida’s management believed that members of world headquarters’ management were aware of the income transfer practices, but raised no objections to them.

-Ore-Ida’s management did not know if world headquarters’ management appreciated the fact that this practice did not conform to GAAP.

-If world headquarters’ senior management had established a satisfactory control consciousness, internal accounting controls that were cost/benefit justified should have been able to survive reasonable pressures to meet or exceed the defined economic goals. In establishing this atmosphere, world headquarters’ senior management apparently did not consider the effect on individuals in the [divisions] of the pressures to which they were subjected. Other factors cited by the committee included: corporate internal auditing personnel report to their respective division managers and not to the director-corporate audit; the lack of an effective Code of Ethics compliance procedure; the lack of standardized accounting and reporting procedures for all Heinz divisions; the lack of an effective budget review and monitoring process; the lack of enough competent financial personnel at world headquarters and at the divisions; and the lack of a world headquarters electronic data processing manager responsible for the control procedures of the divisions’ EDP departments.

-Conclusions of the audit committee

- What business acumen did you apply to the resolution of the Key Issues?

-Guidelines to Problem Solving and Decision Making

-Root cause analysis

- Kotter’s Eight Steps to transforming your organization

-Four Steps of Persuasion

-Five Components to Internal Controls

-GAAP

-Recognizing Revenues and expenses

- What is the solution?

Cunningham needs to create a new incentive program and recreate the internal control process for Heinz with more checks and balances. I recommend that the Guidelines to problem solving and decision making be used to help with Root cause analysis to determine where futures issues will occur. Using Kotter’s eight steps to transforming your organization along with the four steps of persuasion Cunningham needs to reinforce the ethical code and company values. Cunningham and the board of directors also need to focus on the five components to internal controls to reshape this process at Heinz and align with GAAP.

- What steps need to be taken to implement and evaluate this solution?

- Implementation

Cunningham and Board of directors need to reshape the internal control processes and add new staff to help with monitoring of the new process. Cunningham needs to then stress the importance the company ethical coed and values and setup HR with a system for reporting of any violations. Lastly Cunningham and board need to draw up new incentive program that fosters growth through moral and ethical ways and introduce to company. Added cost for new staff will be offset with proper financial reporting and increase in growth.

- Control

Quarterly audits of all divisions will be used to ensure proper GAAP is being followed and proper internal control processes are being instituted throughout. Success of new incentive program will be measured quarterly to makes sure goals are being met or need to be adjusted based on market conditions.

- Contingencies

Company culture must be looked at for a contingency. It is often difficult to change the “old boys club” and implement change effectively if the right people are not on board with the new direction.

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