Diamond Foods Financial Fraud Scandal
Adrienne M Somers
David F McCormick
February 27 2012
In April 2011, Diamond Food Inc (DMND), the nation's largest walnut processor and maker of Emerald nuts announced plans to buy Pringles from Proctor and Gamble for $1.5 billion in stock (Reuters, 2012). This move was part of the company's aggressive growth strategy to become a leader of the snack food industry. Former chief executive officer, Michael Mendes, and former chief financial officer, Steven Neil, spearheaded this effort. However, plans were postponed as questions arose about two large payments that were made to walnut growers in August of 2010 and September 2011 for $20 ...view middle of the document...
First, I will give some background information on the company and the top two executives which is necessary in order to understand the fraud.
A group of California walnut growers founded Diamond Food Inc, (DMND) in 1912. They were the first nut company to start selling overseas in 1950. They were also the first company to advertise on TV in the same year. In 1956, the company became centralized and over the next 40 years, the company continued to grow and expand their products (Diamond Food Corporation, 2013). In 1997, Michael J Mendes became CEO of the company. His goal for the company was to reduce Diamonds reliance on low-margin nut sales by entering the branded snack business and by following a very aggressive growth strategy. This required acquisitions and a lot of cash outflow for marketing. Therefore, he convinced the company to go public so that the company would be listed on the NASDAQ and could raise the capital needed to boost its marketing efforts. He was advised against this and stated that it would be better if they sold the company but unfortunately Mr. Mendez preferred to "get big ourselves" and the company went public (HANNAH KARP, 2012) in his desire to get the company to be the leader in the snack food industry. However, this meant that Diamond Food Inc would now have to compete against the bigger companies for their share in the marketplace. This required vast sums of money to advertise their products and to acquire acquisitions. With the help of his CFO, Steven Neils, they pushed the company to its limits. They reached their projected target and secured their big bonuses and compensation. They started by acquiring Kettle Chips in 2008 and Pop Secret in 2010. Their profit margin increased at a huge rate from 1.5 in 2006 to 5% in 2011. They were on track in making Diamond Food Inc, the largest snack food company in the world. However, by their acts, it became apparent that not everything was as it seemed and in April of 2010 when questions arose about the timing of payment to walnut growers. This is when the scandal broke.
As I stated above, the problem with the timing of the payments first arose in April 2010. Under GAAP, you cannot pay in a future fiscal payment for a prior years' crop. According to Douglas Barnhill, an accountant and walnut grower, he contacted Eric Heidman, Diamonds director of field operations when he received a check in the mail in September of 2011. He wanted clarification on which crop the check was paying. He was told that the payment was for the 2010 crop, part of fiscal 2011, but that it would be "budgeted into next year's crop" (Diamond Foods Accounting Scandal Seeds Sown Years Ago, 2012),which was a direct violation of accounting rules. However, news stories quoted the payments as being an advance payment on next year's crop, which means that that they were moving grower payments around, a technique known as earning management which is delay-recording payments from one fiscal year to the...