Diamond Foods Accounting Scandal Essay example

3139 Words Mar 9th, 2016 13 Pages
Diamond Foods Accounting Scandal

Founded in 1912 as a walnut grower cooperative, Diamond Food’s primary business involved buying walnuts from local California growers, processing the product, and reselling it. The San Francisco-based company converted from a cooperative to a public corporation in July of 2005, issuing its initial shares for $17. By 2010, Diamond Foods (DMND) had expanded and acquired a number of snack food companies including Kettle Brand® Chips and Pop Secret® popcorn and was negotiating the acquisition of the Pringles brand from the Procter & Gamble Company (Diamond Foods, 2014). The addition of the Pringles brand would make Diamond the second-largest global snack foods company behind PepsiCo, Inc.,
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The SEC accused Neil of disguising a portion of the walnut costs as an advance on future crop deliveries, as well as misleading auditors by providing false information and omitting facts to justify his usual accounting practice (SEC, 2014). The SEC also charged Diamond’s Chief Executive Officer (CEO) Michael Mendes with negligence for his role in certifying the inaccurate financial statements. The litigation claimed the CEO omitted facts to external auditors and should have recognized the inflated walnut costs on the statements. Diamond replaced both Mendes and Neil in 2012, and the company agreed to pay a $5 million settlement.

The case of fraudulent accounting for Diamond Foods can be seen to have two drivers. One is the pressure the executives faced to not only meet, but also exceed the earnings estimates of the Wall Street stock analysts and second to continue to keep the longstanding positive relationships with walnut growers as the price of the raw goods increase, according to the SEC Case. The two issues are interconnected, as the company would not be able to report high earnings and growth as the cost of one of its largest pieces of inventory, walnuts, continue to increase. As the price of walnuts raised, the CFO, Steven Neil, developed a scheme to keep the costs down and show increased earnings to meet the pressure set forth by the Wall Street analysts. This was done through a

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