San Francisco based company, Diamond Foods Inc. mislead its investors by lying about walnut costs in order to boost their earnings. The company and its two former lead executives will therefore have to pay five million dollars to settle the civil charges. Allegations that were made by Securities and Exchange Commission stated that the previous Chief Financial Officer for the company spearheaded the fraudulent scheme. The scheme involved under reporting the amount of money paid to Walnut growers by delaying the recording of payments to the next fiscal periods. This scheme allowed the company to register better results and in this manner committed fraud.
The alleged scheme entailed the underpayment of walnuts in a specified year, then later on making up for the variation with unusual payments in the next year. Faced with rapid increases in walnut prices, Diamond was faced with a situation whereby in order to sustain the longstanding relations with the growers, it was necessary to pay them more. The was no way Diamond could increase the amount of money paid to growers, its biggest commodity cost, without lowering the net returns that it reports to the investors.
Diamond executives faced immense pressure to exceed or at least meet the earnings estimates of stock analysts. They therefore brought the entire yearly amount remunerated to growers closer to market prices as a special payment so as to please the walnut growers. They then inappropriately excluded parts of those expenses from the end of year financial statement. Rather than appropriately recording the costs on their financial books, the executives directed the finance team to regard the payment as an advance on goods that had not yet actually been delivered. Diamond manipulated walnut costs in its bookkeeping hence hit set quarterly targets and exceeded estimates set by analysts by disguising the truth that the expenses were actually associated with prior delivery of goods. Therefore these executives mislead the company’s independent auditors by presenting them with inaccurate and incomplete data to validate the odd accounting methods used in recording the payments.
This scheming practice enabled the company to report a strong increase in its stock, thrash the analysts' expectations and report a higher net income. The company misled investors by making them believe that the company was beating set earnings estimates constantly. After an internal investigation was conducted, the company eventually restated its finances and the Diamond's stock price fell.
Corporate officers and executives should not manipulate or doctor financial statements or fiscal numbers to create false impressions of continuous growth in earnings. Companies or organizations require effective and robust antifraud strategies put in place to detect and deter fraud among its employees, especially the highly influential employees like the top executives. An antifraud program should be inclusive of proactive detection techniques, fraud prevention mechanisms and an ultimate civil remedy for the criminal actions detected and investigated during fraud investigation endeavors.
Getting civil remedies or investigating fraud can be a rather costly affair and it is therefore a common belief among organizations that putting in place prevention measures is the most cost-effective and efficient way to control or evade losses from fraud. To be effective in prevention endeavors usually involves assessing the risks to fraud, maintaining honesty and highest ethical standards as an organizational culture and more importantly reducing or possibly eliminating the existing opportunities to engage in fraud.
Work Cited
Jones, Michael. Creative Accounting, Fraud and International Accounting Scandals. Chichester, West Sussex, England: John Wiley & Sons, 2011. Print.
Nigrini, Mark J. Benford's Law: Applications for Forensic Accounting, Auditing, and Fraud Detection. Hoboken, New Jersey: Wiley, 2012. Print.
