Diamond Foods Case Study

· Read the question closely; be sure you know what is being asked. Briefly, indicated the facts of the case and write a brief outline of what you want to fit into your 3 pages.

· Identify the dilemma: explain the ethical issue and support for alternative choices. Contrast reasons using prepositions: benefit/consequences of doing or not doing…

· Explain the benefits/ consequences in terms of who, when, dollar amount, and certainty positive and negative consequences. Consider long run versus short run consequence.

· Choose one position and explain the reason it is more ethical than the alterbatives refuting your support for the other positions. Where there is a dilemma, explain why ethical support for one choice is better than support for the other choices. Explain why this case is important.

Case also can be found at the attached PDF file page 491.

Please use the knowledge related to the book. No outside resource allowed.

Thanks.

Case 7-8

Diamond Foods

On November 14, 2012, Diamond Foods Inc. disclosed restated financial statements tied to an accounting scandal that reduced its earnings during the first three quarters of 2012 as it took significant charges related to improper accounting for payments to walnut growers. The restatements cut Diamond’s earnings by 57 percent for FY2011, to $29.7 million, and by 46 percent for FY2010, to $23.2 million.

By December 7, 2012, Diamond’s share price had declined 54 percent for the year. A press release issued by the company explains in great detail the accounting and financial reporting issues. 1 Diamond Foods, long-time maker of Emerald nuts and subsequent purchaser of Pop Secret popcorn (2008) and Kettle potato chips (2010), became the focus of an SEC investigation after The Wall Street Journal raised questions about the timing and accounting of Diamond’s payments to walnut growers. The case focuses on the matching of costs and revenues. At the heart of the investigation was the question of whether Diamond senior management adjusted the accounting for the grower payments on purpose to increase profits for a given period.

The case arose in September 2011, when Douglas Barnhill, an accountant who is also a farmer of 75 acres of California walnut groves, got a mysterious check for nearly $46,000 from Diamond. Barnhill contacted Eric Heidman, the company’s director of field operations, on whether the check was a final payment for his 2010 crop or prepayment for the 2011 harvest. (Diamond growers are paid in installments, with the final payment for the prior fall’s crops coming late the following year.) Though it was September 2011, Barnhill was still waiting for full payment for the walnuts that he had sent Diamond in 2010. Heidman told Barnhill that the payment was for the 2010 crop, part of FY2011, but that it would be “budgeted into the next year.” The problem is under accounting rules, you cannot legitimately record in a future fiscal year an amount for a prior year’s crop. That amount

should have been estimated during 2010 and recorded as an expense against revenue from the sale of walnuts.

An investigation by the audit committee in February 2012 found payments of $20 million to walnut growers in August 2010 and $60 million in September 2011 that were not recorded in the correct periods. The $20 million payments to growers in 2010 caught the eye of Diamond’s auditors, Deloitte & Touche. However, it is uncertain whether the firm approved the accounting for the payments. It is an important determination because corporate officers can defend against securities fraud charges by arguing they did not have the requisite intent because they relied on the approval of the accountants.

The disclosure of financial restatements in November 2012 and audit committee investigation led to the resignation of former CEO Michael Mendes, who agreed to pay a $2.74 million cash clawback and return 6,665 shares to the company. Mendes’s cash clawback was deducted from his retirement payout of $5.4 million. Former CFO Steven Neil was fired on November 19, 2012, and did not receive any severance.

As a result of the audit committee investigation and the subsequent analysis and procedures performed, the company identified material weaknesses in three areas: control environment, walnut grower accounting, and accounts payable timing recognition. The company announced efforts to remediate these areas of material weakness, including enhanced oversight and controls, leadership changes, a revised walnut cost estimation policy, and improved financial and operation reporting throughout the organization. An interesting aspect of the case is the number of red flags, including unusual timing of payments to growers, a leap in profit margins, and volatile inventories and cash flows. Moreover, the company seemed to push hard on every lever to meet increasingly ambitious earnings targets and allowed top executives to pull in big bonuses, according to interviews with former Diamond employees and board members, rivals, suppliers and consultants, in addition to reviews of public and nonpublic Diamond records.

Nick Feakins, a forensic accountant, noted the relentless climb in Diamond’s profit margins, including an increase in net income as a percent of sales from 1.5 percent in FY2006 to more than 5 percent in FY2011. According to Feakins, “no competitors were improving like that; even with rising Asian demand . . . it just doesn’t make sense.” 2 Reuters did a review of 11 companies listed as comparable organizations in Diamond’s regulatory filings and found that only one, B&G Foods, which made multiple acquisitions, added earnings during the period.

Another red flag was that while net income growth is generally reflected in operating cash flow increases, at Diamond, the cash generation was sluggish in FY2010, when earnings were strong. This raises questions about the quality of earnings.

Also, in September 2010, Mendes had promised EPS growth of 15 percent to 20 percent per year for the next five years. In FY2009, FY2010, and FY2011, $2.6 million of Mendes’s $4.1 million in annual bonus was paid because

Diamond beat its EPS goal, according to regulatory filings. It was expected that the company would likely face a civil enforcement action by the SEC for not maintaining accurate books and records and failing to maintain adequate internal controls to report the payments properly, both of which are required for public companies. If the SEC decides to bring

1 Available at www.investor.diamondfoods.com/phoenix.zhtml?c= 189398&p=irol-newsArticle&id=1758849 .

2 Available at www.reuters.com/article/2012/03/19/us-diamondtax- idUSBRE82I0AQ20120319 .

Chapter 7 Earnings Management and the Quality of Financial Reporting 469 a civil fraud case against any individuals at Diamond Foods, the Dodd-Frank Act gives it the option of filing either an administrative case or a civil injunctive action in Federal District Court. An administrative proceeding is generally considered a friendlier venue for the SEC.

Questions

1. One of the red flags identified in the case was that operating cash flow increases did not seem to match the level of increase in net income. Explain the relationship between these two measures and why it raised questions about the quality of earnings at Diamond Foods.

2. Why were the actions of Diamond Foods with respect to its ‘accounting for nuts’ unethical?

3. The role of Deloitte & Touche is unclear in the case. We do not know whether the firm approved the accounting for the payments to walnut growers and periods used to record these amounts. Assume that the firm identified the improper payments and discussed the matter with management (i.e., CFO and CEO). What levers might Deloitte use to convince top management to correct the materially misstated financial statements?

GRADING

Your grade will be based on the extent to which you can clearly convey to me and your classmates what organization and the problem you studied, why you studied that, how you studied it, what you found, and how your findings and/or solutions offered match one or more OB concepts learned in class. The best presentations will:

1) Be interesting and actively engage the audience

2) Deliver the key information from your report in a manner and order that is easily understood

3) Enhance your classmates’ learning of organizational behavior theory and concepts

4) Demonstrate professionalism (e.g. don’t go overtime, answer questions thoughtfully, etc.).

 

Write a speech based on the paper. 210 words

 

Communication 

Problem: Due to the remote nature of this acquisition, there is an over reliance on email correspondence between ATS and Creation, communication delays are a symptom of Creations highly mechanistic organizational culture with high centralization and a rigid and highly hierarchical chain of command. This organizational structure is necessary because ATS is still transitioning into Creation, as Creation is not entirely on site. Employees’ communication is hampered by timing problems between superiors and the employees. The fact that time is lost when waiting for responses from superiors causes back ups for the employees when attempting to execute their tasks. Since the employees are waiting for confirmation from their superiors, rather than feeling empowered to make decisions themselves we can see the Mechanistic organizational structure at work..

 

Solution: Currently Creation has a Mechanistic organizational culture with high centralization and a rigid and highly hierarchical chain of command, but if they incorporate pockets of organic organizational culture the communication problem will be reduced.  If groups on site are empowered to make decisions then fewer emails will need to be sent to the off site C suite executives and managers.  Furthermore with reduced centralization and a less hierarchical chain of command then the employees have more people they can reach out reducing the time lost waiting for responses from superiors.

 

PRBS sequences find their application in the field of information management such as telecommunication, data encryption, system simulation, statistical correlation methods, and the spectroscopy of flight times (Awschalom, Loss & Samarth, 2002).

The practical process for generating the Pseudorandom binary sequences can be implemented through shift registers that can provide linear feedbacks (Horowitz and Hill, 1989). Examples of the sequences that generate polynomials are stated below:

The PISO shift register (Parallel-in to Serial-out) operates in an opposite direction as the SIPO register. The shift register receives data in parallel form. All the inputs of the data bits enter the parallel input pins simultaneously. The parallel pins are labeled as P1, P2, P3, and P4in the PISO shift register (Hetzel, 1988). The reading of the input data then takes place in sequential order inside the PISO register in a shift-right mode (Maini, 2007). This takes place at the Q data output pins of the register. Q represents the available data at the input pins P1 to P4. The output of the data comes out 1 bit each time on every clock cycle (Crowell & Press, 2002). As the input is in parallel format, the output of the data at Q is in serial format. Fundamentally, in the PISO system, there is no need for generating a clock pulse (Brown et al, 1992). The clock pulse is already present in the register for parallel loading. However, during the unloading of the data, the register requires the generation of 4 clock pulses (Predko and Predko, 2004).

The PISO shift register transforms parallel input data into serial output data whose size fully depends on the size of the input signals. For example, the input can be 8 – bit data that can be converted into serial formats (Zvi & Niraj, 2009). It multiplexes multiple input data into one serial stream of output that can move directly to a computer or flow in a communication line.

• Write the code for each lab assignment.
• Submit the lab in a single zip file in the online course shell. The lab must contain all .cpp files, along with any additional files that may be necessary for your project to run (ex: text files).
• Enter any and all written answers into the online course shell along with the submission of the attached lab assignment.

Please submit each lab assignment with only two files for grading.

a .cpp file of your C++ program design (source code)

a .docx file of its program’s successful execution output in Word format.

 

Each lab assignment will be graded based on the following:

1. The program must compile, execute, produce correct results, and meet all of the specifications in the weekly lab.

Additionally you must:

2. Organize the code for user readability.

3. Organize the code for reusability.

4. Provide documentation with embedded comments for reader understanding.

5. Organize the code for efficiency.

 

Homework 1: 

 

During each summer, John and Jessica grow vegetables in their backyard and buy seeds and fertilizer from a local nursery. The nursery carries different types of vegetable fertilizers in various bag sizes. When buying a particular fertilizer, they want to know the price of the fertilizer per pound and the cost of fertilizing per square foot. The following program prompts the user to enter the size of the fertilizer bag, in pounds, the cost of the bag, and the area, in square feet, that can be covered by the bag. The program should output the desired result. However, the program contains logic errors.

 

Find and correct the logic errors so that the program works properly.

 

//Logic errors.

#include <iostream>

#include <iomanip>

using namespace std;

int main()

{

double cost;

double area;

 

double bagSize;

cout << fixed << showpoint << setprecision(2);

cout << “Enter the amount of fertilizer, in pounds, ”

<< “in one bag: “;

cin >> bagSize;

cout << endl;

 

cout << “Enter the cost of the ” << bagSize

<< ” pound fertilizer bag: “;

cin >> cost;

cout << endl;

 

cout << “Enter the area, in square feet, that can be “

<< “fertilized by ne bag: “;

cin >> area;

cout << endl;

 

cout << “The cost of the fertilizer per pound is: $”

<< bagSize / cost << endl;

cout << “The cost of fertilizing per square foot is: $”

<< area / cost << endl;

 

Return 0;

 

}

 

Homework 2:

 

Linda is starting a new cosmetic and clothing business and would like to make a net profit of approximately 10% after paying all the expenses, which include merchandise cost, store rent, employees’ salary, and electricity cost for the store. She would like to know how much the merchandise should be marked up so that after paying all the expenses at the end of the year she gets approximately 10% net profit on the merchandise cost. Note that after marking up the price of an item she would like to put the item on 15% sale. Write a program that prompts Linda to enter the total cost of the merchandise, the salary of the employees (including her own salary), the yearly rent, and the estimated electricity cost. The program then outputs how much the merchandise should be marked up so that Linda gets the desired profit.