Diamond Foods, Inc. Case Study.

GENERAL QUESTIONS: 1. In this case, Diamond Foods was accused of managing earnings in an unethical manner?

Provide two specific examples of how a company could ethically improve net income?

2a. Why do you think accounting personnel (the finance team) seemed to go along with the schemes to understate the cost of walnuts in both fiscal year 2010 and fiscal year 2011?

Provide as many possible reasons you can think of?

2b. Instead of agreeing to record the extra payments to growers as advances and, in effect, helping the company falsify the financial statements, what other alternative actions were available to the finance team?

Consider professional standards, such as the IMA (Institute of Management Accountants) Statement of Ethical Professional Practice or the AICPA (American Institute of Certified Public Accountants) Code of Professional Conduct, when answering this question?

3. At the time of this writing, charges against Steven Neil, the former CFO of Diamond Foods, were still pending. Conduct research to determine the status of these charges. In your opinion, why do you think Michael Mendes, the former CEO of Diamond Foods, chose to settle charges with the SEC, whereas Neil is disputing the charges?

AUDITING QUESTIONS:

4. Describe the fraud triangle. Discuss the components of the fraud triangle in the context of this case?

5a. The auditors were misled by both Michael Mendes and Steven Neil. Neil even signed a management representation letter. Describe what a management representation letter is. Do you believe that it, and other representations by management, constituted sufficient appropriate audit evidence in this case? Defend your answer. (Hint: Review the requirements of Statement on Auditing Standards (SAS) No. 99, paying particular attention to the concept of fraud risk factors (red flags) in an auditing context.)

5b. Describe what the terms analytical procedures and professional skepticism mean in an auditing context. Do you think the auditors should have discovered the alleged fraud perpetrated in the financial statements in fiscal year 2010 and fiscal year 2011? Defend your answer.

5c. Conduct research as to (1) who the auditors were during the timeframe of this case and (2) the current status of any litigation against the auditors.

Discuss any allegations against the auditors, including your opinion as to the merits of the allegations. 6. If the auditors had discovered the alleged fraud, what is the appropriate action, or series of actions, for an audit firm of a publicly traded company (such as Diamond) that becomes aware of illegal acts by the clients management?

COST/MANAGERIAL ACCOUNTING QUESTIONS:

7. How could management accounting tools, such as variance analysis, benchmarking, and Cost-VolumeProfit analysis, have been used to highlight Diamonds profitability challenges?

8. How could the budgeting process have been used to help Diamond achieve its targets without resorting to the alleged financial statement irregularities?

9. Reconcile the 2010 walnut cost payments with the final walnut cost of $0.74 per pound recorded in the 2011 financial statements?

10. Why was the 2010 momentum payment larger than the 2009 continuity payment? If the earnings management was not exposed, do you believe the earnings management could have continued? If the earnings management did continue, how would it likely have been done?

11. Describe the different reasons for managing earnings.

12. What are the disincentives for managing earnings?

13. Which IMA ethical guideline(s) was violated by Diamonds CFO?