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

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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.…...

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