The case study 7-8 Diamond Foods 3E_latest complete solution.
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BUSINESS 101 (BUSINESS101)
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University Of Florida
The case study, requirement: · Read the question closely; be sure you know what is being asked. Briefly, indicated the facts of the case and write a brief outline of what you want to fit into your 3 pages. · Identify the dilemma: explain the ethical issue and support for alternative choices. Cont...
the case study 7 8 diamond foods 3elatest complete solution
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BUSINESS 101 (BUSINESS101)
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The case study 7-8 Diamond Foods 3E
Case 7-8
Diamond Foods
On November 14, 2012, Diamond Foods Inc. disclosed restated financial statements tied to an accounting
scandal that reduced its earnings during the first three quarters of 2012 as it took significant charges related
to improper accounting for payments to walnut growers. The restatements cut Diamond’s earnings by 57
percent for FY 2011 to $29.7 million and by 46 percent for FY 2010 to $23.2 million. By December 7,
2012, Diamond’s share price had declined 54 percent for the year. A press release issued by the company
explains in great detail the accounting and financial reporting issues.
Diamond Foods, long-time maker of Emerald nuts, and subsequent purchaser of Pop Secret
popcorn (2008) and Kettle potato chips (2010), became the focus of a SEC investigation after The Wall
Street Journal raised questions about the timing and accounting of Diamond’s payments to walnut growers.
The case focuses on the matching of costs and revenues. At the heart of the investigation was the question
of whether Diamond senior management adjusted the accounting for the grower payments on purpose to
increase profits for a given period.
The case arose in September 2011, when Douglas Barnhill, an accountant who is also a farmer of
75 acres of California walnut groves, got a mysterious check for nearly $46,000 from Diamond. Barnhill
contacted Eric Heidman, the company’s director of field operations, on whether the check was a final
payment for his 2010 crop or prepayment for the 2011 harvest. (Diamond growers are paid in installments,
with the final payment for the prior fall’s crops coming late the following year.) Though it was September
2011, Barnhill was still waiting for full payment for the walnuts he had sent Diamond in 2010. Heidman
told Barnhill that the payment was for the 2010 crop, part of FY 2011, but that it would be “budgeted into
the next year.” The problem is under accounting rules you cannot legitimately record in a future fiscal year
an amount for a prior year’s crop. That amount should have been estimated during 2010 and recorded as an
expense against revenue from sale of walnuts.
, An investigation by the audit committee in February 2012, found payments of $20 million to
walnut growers in August 2010 and $60 million in September 2011 that were not recorded in the correct
periods. The $20 million payments to growers in 2010 caught the eye of Diamond’s auditors, Deloitte &
Touche. However, it is uncertain whether the firm approved the accounting for the payments. It is an
important determination because corporate officers can defend against securities fraud charges by arguing
they did not have the requisite intent because they relied on the approval of the accountants.
The disclosure of financial restatements in November 2012 and audit committee investigation led
to the resignation of former CEO Michael Mendes who agreed to pay a $2.74 million cash clawback and
return 6,665 shares to the company. Mendes’ cash clawback was deducted from his retirement payout of
$5.4 million. Former CFO officer Steven Neil was fired on November 19, 2012 and did not receive any
severance.
As a result of the audit committee investigation and the subsequent analysis and procedures
performed, the company identified material weaknesses in three areas: control environment, walnut grower
accounting, and accounts payable timing recognition. The company announced efforts to remediate these
areas of material weakness, including: enhanced oversight and controls; leadership changes; a revised
walnut cost estimation policy; and improved financial and operation reporting throughout the organization.
An interesting aspect of the case is the red flags including unusual timing of payments to growers,
a leap in profit margins, and volatile inventories and cash flows. Moreover, the company seemed to push
hard on every lever to meet increasingly ambitious earnings targets and allowed top executives to pull in
big bonuses, according to interviews with former Diamond employees and board members, rivals, suppliers
and consultants, in addition to reviews of public and nonpublic Diamond records.
Nick Feakins, a forensic accountant, noted the relentless climb in Diamond’s profit margins
including an increase in net income as a percent of sales from 1.5 percent in FY 2006 to more than 5
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