Diamond Food Case Project
1. Manipulation of commodity cost. As a common practice in the company, management would instruct related accounting employee to decrease the commodity costs by a small incremental at a time, until the desired earning numbers for that period was achieved.
2. Special accounting treatment of grower payments. Diamond made “continuity payment” and “momentum payment” to manipulate cost to growers. These payments were claimed to be advances for multi-year supply from growers, hence the company delay the recognition of these amounts as costs in later periods. However, payments to growers were actually for the crop in prior year although Diamond insisted the payments were for current year; and
…show more content…
“Iron curtain approach quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origination”, which means it consider the accumulated effects of the error from prior year. Under rollover approach, effect of 20 million “continuity” payments, which should have been recorded in fiscal 2010, was recorded as cost in fiscal 2011. And “momentum” payments made in 2011 of approximately 60 million were understated in fiscal 2011. Only considering misstatements in income statement, the misstatements in fiscal 2011 was 40 million. The misstatement of 40 million, which is 3.1% of total assets at the end of fiscal 2011, should be evaluated as a material misstatement since the overall materiality is between 0.25 and 2 percent of the total assets. In addition, net income of 2011 fiscal year was around 50 million. The misstatement of 40 million, which also affected the costs for the same amount, accounted for 80 percent of net income. Net income would decrease sharply if adjustment of 40 million misstatement was made. Therefore, the misstatements were material under rollover approach. Under iron curtain approach, auditors should have considered the effects of the misstatements in prior years if the misstatements have not been adjusted yet. Combining 20 million “continuity” payments in 2010 and 60 million “momentum” payments in 2011, we could