Krispy Kreme Case Study
The report followed a 10-month investigation of Krispy Kreme by a special board committee. The internal report provided details of how a team led by former CEO Scott A. Livengood fudged financial results starting in the late 1990s. The report marked the company's clearest account yet of its financial and governance shortcomings and led to the retirement of Mr. Livengood, the resignation of the COO, and the termination of others.
After going public in 2000, Krispy Kreme tried to capitalize on Wall Street's appetite for growth stocks but the company wasn't ready. The report, a 24-page summary of which was made public in a regulatory filing, says Krispy Kreme lacked proper internal controls, didn't employ a general counsel for a two-year period and hired three chief financial officers in four years -- including one who told the panel he wasn't comfortable in the job. Having a high turnover for the CFO position tells me as an accountant that the CFOs were leaving because they did not like what they observed …show more content…
The report did not directly allege that the CEO and COO committed fraud. The report did include a strong condemnation of the management. And the management is always led by the CEO and COO as well as the CFO. In the case of Krispy Kreme the CEO and the COO were running the show.
For reasons that are unclear the CFO was not directly involved in the accounting manipulations. Four CFOs had come and gone and we can only guess that they had been either uncooperative with the accounting manipulations being implemented by the CEO and COO or they elected to move on once they realized that accounting games were being played. The report makes it very clear that the accounting manipulations were the fault of the CEO Mr. Livengood, and the Krispy Kreme outside directors. It was confirmed and disclosed that the senior management had improperly profited from the accounting games from their …show more content…
Management failed to create an ethical environment by failing to model ethics. The CEO Mr. Livengood was discovered to have abused his use of Krispy Kreme corporate aircraft. In a period of two years he racked up at least $320,000 more in personal-flight costs than was permitted by the board of directors. What was also an ethical lapse the company filings hid the true costs from shareholders.
Furthermore, it was revealed that the company decided to spend $500,000 to sponsor a "storytelling festival" in the hometown of the CEO’s wife. Part of the money came from a "brand fund" paid for by franchisees, some of whom have criticized the spending as a waste of money for Mr. Livengood's personal benefit.
The panel also described several methods that it said were used to boost results. For instance, it said Krispy Kreme improperly boosted profits by shipping high-margin doughnut-making equipment to franchisees long before they wanted or needed it. Though the company would book revenue, some of that equipment would then sit unused for months in trailers controlled by Krispy Kreme, and franchisees didn't have to pay until it was actually installed, said one person familiar with the probe's