Priscilla Burnaby, PH.D., CPA
Bentley University
Susan Hass, MBA, CPA, CGMA
Simmons College
Donna McConville, CPA, JD
Bentley University
Learning Objectives
After completing and discussing this case, you  should be able to
Recognize a food company recording costs in the wrong period.
Understand  how company culture and senior management can influence behavior and lead to the wrong decisions.
Recognize how financial statements and reporting are impacted by fraudulent activities.
Identify how fraud can be prevented and appreciate how other stakeholders respond to fraud allegations.
The leadership of Diamond Food(DF), the global California-based premium snack food company , was excited. In the fall of 2011, the company was close to finalizing an agreement with Proctor & Gamble to acquire  the Pringles brand in exchange for DF stocks. This acquisition would help the company to achieve the number two position in the U.S.  snack food industry behind Pepsi Co. DF  product lines currently included potato chips  (kettle), popcorn (Pop-Secret), and nuts(snuck nuts, in-shell nuts and culinary nuts) (Emerald and Diamond of California). D.F  started in 1912 as a grower – owned cooperative called Diamond of California.  The company originally focused on walnuts, but more recently they transformed into a diverse snack food company. The business changed from a co-operative business status and went public in 2005 with the NASDAQ  ticker DMND. The stock priceincreased, and in September 2011, the price was at an all-time high $92 per share.
     He person who orchestrated the company’s expansion and growth was CEO and President Michael Mendes, who was hired in 1997. He had previously worked at Hormel Foods Corporation and Dole Food Company. Mendes was very competitive and implemented the companywide philosophy of ‘bigger is better.’ This viewpoint was the corporate culture, and it had significant impact on employees DF. This aggressive company culture resulted in an emphasis on financial performance and some bold and very expensive acquisitions.(e.g., Kettle and Pop Secret). The most expensive acquisition was to be Pringles.  DF was making this acquisition so it could be a significant player in the very competitive snack foods space where it felt pressure for financial success and greater market share amid increasing industry competition.
   In fall 2011, Mark Roberts, founder of the Off Wall Street Consulting Group, received an anonymous call. For the physical year ending in July 2011,  the caller indicated that DF was making ‘momentum payments ‘ to growers for walnuts delivered in September  2011. It appears that  the approximately $60 million payments could be impacting the wrong physical  year financial statements. Roberts accused DF of incorrectly reporting its payments to suppliers on the company financial statements. DF denied any illegal actions, they replied that the payments were an advance on the fiscal 2012 crop and had nothing to do with fiscal 2011. Unfortunately, the nut growers disagreed. They wee told by the company to keep the money even if they were not going to provide crops in 2012.  Supposedly, they were told that the payments were for the prior year.
    Investigation into the situation ascertained that an additional approximately  $20 million of ‘continuity payments’ were made by DF to growers in fall 2010. Again, the question arose as to what fiscal  year did payments  relate. Were the payments recorded in the proper year? Were the books cooked? Would the Pringles acquisition occur?
1.Review Research Diamonds Foods website. find and read articles written about the problems they had with payments to the nut growers in 2010 and 2011. Did Diamond record payments to the nuts growers in the wrong period? Did the company commit fraudulent acts?
2. What financial accounting rules are applicable in this instance?
a. In what physical periods should fall 2010 and fall 2011 payments have been recorded in the DF income statements?
b. Is this a different period than when the cash was paid to the growers?
c. What was the impact on the company’s financial statements in those years?
3. What other factors were occurring at the company that may have contributed to this situation? Consider hints in the case and the articles you reviewed in question (1) above as you answer this question.
4. Who found the fraud? How could it have been prevented? What actions did the company take as a result of these events?
5. Did Diamonds Foods acquire the Pringles line from Proctor & Gamble?