THE ADMINISTRATION

OF POLICY
SANCHALI ANTAL
RITIKA DUBE
GAGAN YADAV
SHANTANU MANISH
TUSHAR AGARWAL
 • James Cunningham, H. J. Heinz company’s
president and COO learnt that the company that
engaged in improper income transferal practices
since 1972.
• Payments made to vendors in a fiscal year were
ABOUT repaid/exchanged for services in the next.

THE • Improprieties discovered in Heinz USA division’s

relationship with an advertising agency.
ARTICLE • Joseph Stangerson, Senior VP, Secretary and
General Counsel found out that even Star-Kist
Foods used these practices.
• John Bailey, Vice Chairman and CEO; Robert
Kelly, Senior VP-Finance and Treasurer also
heard about the since.
 BACKGROUND
• Henry J. Heinz found the company in Pittsburgh, Pennsylvania in 1869.
• In 1979, Heinz operated 30 companies with products reaching 150 countries.
• Heinz had a sales of $2.2 billion in 1978.
• Being a multinational firm, domestic operation were of 62% of sales and 67% of
earning in 1978.
• Five major divisions operated in the US in 1979.
 • Heinz was organized on two primary levels in 1979.
• Corporate world headquarters in Pittsburgh, had
Principal Corporate officers and small staff; had the
responsibility of setting overall standards and ensure
performance.
ORGANIZATION • Some reported directly to president; some to Senior
VPs.
• Division managers responsible for operated own
research, development, manufacturing and marketing.
• Review held near end of third fiscal quarter to discuss
expected year-end results.
 MANAGEMENT
INCENTIVE PLAN
• Prime management tool used to achieve corporate goals.
• Had 225 employees, including corporate officers, senior
world headquarter personnel and seniors of all divisions.
• Incentive was awarded on basis of number of earned MIP
points.
• These points could be achieved through personal goals, net
profit after tax (NPAT), etc.
• Goals were set for each division and not changed during the
year.
• No points awarded if division failed to achieve goal.
• Participation limited on 19 people.
 CORPORATE ETHICAL POLICY
Heinz had an explicit corporate ethical policy that was adopted in May 1976. It stated that no
division should:
1. have any form of unrecorded assets or false entries on its books or records;
2. approve any payment with the intention that any part of such payment was to be used for any
purpose other than that described by the documents supporting the payment;
3. make political contributions;
4. make payments or gifts to public officials or customers; or
5. accepts gifts or payments of more than a nominal amount.
Each year one senior from each division were required to sign a representation letter which
confirmed compliance with the corporate Code of Ethics.
 APRIL 1979

It had filed a case against

In April 1979, Campbell
Heinz itself found out Campbell Soup
asked about flow of
about the alleged Company for
funds and Arthur West,
practices by the antitrust monopolistic practices in
President, refused to
proceedings. 1976; Campbell
answer.
countersued.
 DISCOVERY OF INACCURACY
In 1979, the top management
learned of improper practises where
the income of one fiscal year was
reported for the next year.
This led to the estimates of the
company’s income to be incorrect
for the past 7 fiscal years.
The scope of the improper practise
was not known.
To understand the seriousness of the
situation, the CEO of the company
decided to form a panel of third-
party auditors, lawyers and
accountants with the company's
accountants and auditors to
understand the problem.
 The investigation focused on the occurrence
of violation of company’s code of ethics.

Illegal political contribution

THE
INVESTIGATION
Illegal or improper payments

Accuracy of the income and asset estimates

of the company.
THE FINDINGS
• Improper estimate of expenses.
• Improper estimate of sales.
 Use of improper invoices to transfer
income

Contained descriptions of services that

were generic or had no correlation to
the actual services to be rendered
ORE-IDA
management board believed the
practice was appropriate

FY 1974 corporate management

increased Ore-Ida’s income before tax
for MIP award purposes.
 STAR-KIST
• Improper expense recognition and improper sales recognition
• Improper invoices were solicited from vendors to accumulate an
advertising savings account.

OTHER PRACTICES
All of these transactions took place outside the United States.

In one country six questionable payments totaling $80,000 were made during FY 1978 and FY 1979.

Two were made to lower-level government employees -- alleged violations of import regulations.

One was made to a lower-level government employee – settlement of a labor dispute.

Municipal employees received one payment - real estate assessments.

Labor union officials received the remaining two payments.

CONTRIBUTING
FACTORS
THE AUDIT COMMITTEE- autonomy enjoyed by the
division management, made it difficult for world
headquarters personnel to detect these practices.

Lack of control consciousness throughout the corporation

CONTROL CONSCIOUSNESS- atmosphere in which

accounting controls existed. It reflected senior
management attitudes about the importance of such
controls.
OTHER FACTORS CITED BY THE
COMMITTEE INCLUDED LACK OF:

effective standardized effective competent

Code of accounting budget financial
Ethics and review and personnel at
compliance reporting monitoring world
procedure procedures process headquarters
and at the
divisions
1. The amounts involved in the income transferal
practices were not material to the consolidated net
income in the aggregate during FY 1972-Y 1978.
2. The income transferal practices were achieved
primarily through existing internal controls by
division personnel.
3. Continuance of income transferal practices
was facilitated by the company’s philosophy of
decentralized management.
4. No individual employee obtained any direct
financial benefit from the practices.
5. Perceived pressures for achievement of MIP
goals contributed to the divisions’ desirability of
providing a cushion against future business
uncertainties.
6. The income transferal practices did not serve any valid corporate need.
7. The income transferal practices indicate the lack of sufficient control
consciousness within the corporate structure
8. World headquarters did not have the number of competent financial personnel
needed to fulfill its role.
9. The continuance of the income transferal practices was aided by the reporting
relationships of the internal audit staffs within the company.
10. The board of directors and management of the company have the duty to take
all steps to ensure safeguarding the assets of the company
 The Audit Committee
Recommends to focus the
If these recommendations
Following Points:-
are approved and put into
• The Control Environment
Following an effect, this would benefit
• Role of Audit Committee
Investigation in the use of • Strengthening Accounting
the financial Integrity of
Improper income Controls and Financial the accounts and would
Transferal other Practices reporting also assist the
at the Heinz Company. • Reorganization Internal Audit management of the
• Compliance with Accounting company in the
Provisions
• The Code Of Conduct stewardship of its assets
• Review of Management
Incentive Plan
• Independents Accountants of
the Company
•The Control Environment
• At All levels of the company, any violation of internal controls, corporate policies and the COC of
the company will not be tolerated.
• The officers will be charged, and an investigation will take place.
• The results will be attained in a proper and legal manner

•Role of the Audit Committee

• Subject to the concurrence on the board of the directors, this committee intends to conduct a
continuing surveillance in this report.
• This Committee Believes that the role of the audit committee should be expanded.

•Strengthing of the Accounting Controls and Financial Reporting

• Standard Accounting Policies and Procedure
• Affiliate Finance Department Personnel
• Affiliate Marketing Accountants
• Inventory
Reorganization and Strengthing of Internal Audit

• Planning, control and direction, all affiliates

vested in director- corporate audit
• Internal Audit function independent of other
departments of the company.
• Director –corporate audit will report to CEO
and Audit Committee
• All internal auditors of the affiliates not
presently on the staff of the corporate audit
department be transferred to that department
• The director- corporate audit review of the
qualifications of all Corporate audit department
and all internal auditors
• The director –corporate audit prepare a
statement of the goals and objectives both short
term, long term and of the internal audit
function of the company.
Compliance with Accounting Provisions of Foreign Corrupt Practices Act (FCPA)
• The CEO should appoint a FCPA Compliance Committee consisting of a senior operating
officer, a representative of the corporate legal department, accounting function and the
director- corporate audit.
• The FCPA Committee should prepare and submit a program designed to meet the
requirements of the FCPA.

Code of Conduct
The new COC should include provisions with respect to the following subjects:
• internal control and accounting standards and practices
• relationships with auditors
• gifts, favors, and improper payments
• compliance with applicable laws, including laws relating to antitrust
• conflicts of interest
• political contributions
• responsibilities of supervisors and employees.
Review of Management Incentive Plan (MIP)
• The chief executive officer, in cooperation with the
Management Development and Compensation Committee
of the board of directors, institute a thorough review of
the aims and mechanisms of both the MIP and the long-
term incentive plan in order to determine what changes
therein would.
• Consideration to what standards of achievement should be
applicable to different classes of personnel.
Independent Accountants for the Company
• Emphasize to all employees of the company that there is
to be a new era in accounting and reporting practices.
• This committee recommends that solicitations be
entertained from various independent accounting firms to
select the best independent accountants to conduct the
audits for the company for the fiscal years commencing
with FY 1981.
THANK YOU!