Diamond foods scandal

ISSUES IN ACCOUNTING EDUCATION American Accounting Association Vol. 30, No. 1 DOI: 10.2308/iace-50948 2015 pp. 47–69

Diamond Foods, Inc.: Anatomy and Motivations of Earnings Manipulation

Mahendra R. Gujarathi

ABSTRACT: Diamond Foods is America’s largest walnut processor specializing in processing, marketing, and distributing nuts and snack products. This real-world case presents financial reporting issues around the commodities cost shifting strategy used by Diamond’s management to falsify earnings. By delaying the recognition of a portion of the cost of walnuts acquired into later accounting periods, Diamond Foods materially underreported the cost of sales and overstated earnings in fiscal 2010 and 2011. The primary learning goal of the case is to help students understand the anatomy and motivations of earnings manipulation. Specifically, students will have the opportunity to (1) apply the FASB’s Conceptual Framework to a real-world context, (2) determine the nature of errors and compute their numerical effects on financial statements, (3) understand motivations for earnings management and actions needed for managing earnings of future years, (4) explain the anatomy of financial reporting fraud by reconstructing journal entries, (5) prepare comparative financial statements for retroactive restatements, (6) explain the rationale for clawback provisions in compensation contracts, and (7) understand the difference between the real and accrual-based earnings management.

Keywords: earnings management; financial statement fraud; restatements; error correction; clawback provision; Conceptual Framework.

This company was on the verge of becoming a real global consumer-product company

with Pringlest. I always said if they could make it work, it could be a highflier. And it

worked—until it didn’t.

—RBC Analyst Edward Aaron

(Businessweek, January 12, 2012)

Mahendra R. Gujarathi is a Professor at Bentley University and Adjunct Professor at the Indian Institute of

Management, Ahmedabad.

The author thanks Professors Martha Howe, Donna McConville, Ari Yezegel, participants at the 2013 North American Case Research Association Annual Conference, the 2013 American Accounting Association Northeast Region Annual Meeting, and 2014 American Accounting Association Annual Meeting for their comments and suggestions on the earlier versions of the case. Comments and suggestions of the editor, associate editor, and two anonymous reviewers are also gratefully acknowledged.

Supplemental material can be accessed by clicking the links in Appendix A.

Published Online: October 2014

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INTRODUCTION

D iamond Foods, Inc. (hereafter, Diamond, or the Company), is America’s largest walnut

processor specializing in processing, marketing, and distributing nuts and other snack

products (Reuters 2012). Diamond’s products are distributed globally in stores where

snacks and culinary nuts are sold. Its major processing and packaging plant is located in California, the

state that accounts for virtually the entire walnut production in the U.S. The Company has

approximately 1,700 employees and its stock trades on the NASDAQ market under the symbol DMND.

History: From Walnut Processor to Innovative Packaged-Food Company1

Diamond began in 1912 as a member-owned agricultural cooperative association, specializing