Monday, 6 May 2019

Kraft Heinz and its SEC Investigation Threatens to Impact Others

In February Kraft Heinz announced that the Securities and Exchange Commission was opening an investigation into its accounting practices. In this post, we will examine the potential scope and ramifications of that investigation as, although Kraft Heinz have not found any irregularities internally, there are a number of associated organisations who will potentially be embroiled in the scandal if it is found to exist.

We have discussed Kraft Heinz as a company before here in Financial Regulation Matters, mostly on account of its failed attempt to take over Unilever in 2017. Whilst the subpoena was announced in February of this year, it was actually received in October and the subpoena related to the firm’s ‘accounting policies, procedures, and internal controls’. The company then, in February, took a $15.4 billion impairment charge, or a ‘writedown’, and that is now believed to be something the SEC are also investigating. The company stated that the writedown reflected ‘lower margin expectations’, but this also ties into a concerted strategy to divest across the company on account of its growing $30.9 billion debt pile. This somewhat justifies the views taken in the previous blog posts regarding the differing styles of capitalism adopted by 3G and Berkshire Hathaway, and that of Unilever. Since that failed attempt and the rapturous attention Wall Street have given the company, 3G’s notorious approach for slashing the company to pieces has inevitably backfired, with the firm losing $75 billion from its value in just 2 years and the $15.4 billion writedown concluding that period. The exact same trend can be witnessed in 3G’s other businesses, like Anheuser-Busch InBev NV, the world’s largest brewer of alcohol.

Another potential aspect is that PricewaterhouseCoopers, Kraft Heinz’s auditor, may become embroiled in the firm’s troubles. There has been very little suggestion of this in the business media, but the issue of accounting malpractice, if not uncovered by PwC in its auditing of the firm, will surely become an issue if the SEC find malpractice as part of their investigation. This would be particularly unwelcome for PwC, given that it has only just received a ‘record’ fine from British regulators (£6.5 million over it auditing of BHS), and much larger fines from US regulators ($335 million regarding the collapse of Colonial Bank). When we consider that there is a growing call to reform the industry and, essentially, dismantle the hegemony of the Big Four, yet another scandal could have massive effects for the future of the auditing industry (although it likely will not, given the power dynamics within that particular oligopolistic industry).

Kraft Heinz represents a particular mode of capitalism that is pure in its intention. It does not tolerate what it deems as inefficient (workers were recently denied ‘perks’ such as free cheesestring products whilst on duty), and its owners (3G in particular) are incredibly renowned for its brutal cost-slashing policy. However, even though the businessman who can do no wrong – Warren Buffet – chose to back 3G in a number of its endeavours, there are troubles ahead for that mode of capitalism. This is troubling for Buffet too as Berkshire Hathaway, his investment vehicle, starts readying itself for life without Buffet at the helm – it is almost certain that this will be a tumultuous time for the vehicle as investors cast scrutiny on the real company without its famous leader. The impact of this current investigation into Kraft Heinz could be far reaching indeed.

Keywords – Kraft Heinz, Capitalism, PwC, Business, Audit, Warren Buffet, @finregmatters

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