Diamond Foods Payments to Nut Growers

The leadership of Diamond Foods (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 Pringles brand in exchange for DF stock, this acquisition would help the company achieve the number two position in the U.S. snack foods industry behind PepsiCo. DF product lines currently included potatoes chips (Kettle), popcorn (Pop-Secret), and (nuts) snack nuts, in-shell nuts and culinary nuts) Emerald and Diamond of California). DF 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 price increased, and in September 2011, the price was at an all-time high of $92 per share.

The person who orchestrated the companys 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. Mendez was very competitive and implemented the companywide philosophy of bigger is better. This viewpoint was the corporate culture, and it had a significant impact on employees of 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 of 2011, Mark Roberts, founder of the Off-Wall Street Consulting Group, received an anonymous call. For the fiscal 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 fiscal year financial statements. Robert accused DF of incorrectly reporting its payments to suppliers on the company financial statements. DF denied any illegal actions, and they replied that the payments were on advance on the fiscal 2012 crop and had nothing to do with fiscal 2011. Unfortunately, the nut growers disagreed. They were told by the company to keep the money even if they were not going to provide crops for 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 growers in fall 2010. Again, the question arose as to what fiscal year did these payments relate. Were the payments recorded in the proper year? Were the books cooked? Would the Pringles acquisition occur?

1. There are many accounting rules that may apply in this case. Discuss the rules that you believe may apply.

• In what fiscal periods should fall 2010 and fall 2011 payments have been recorded in the DF income statements?
• When was the cash paid to the growers? Was it a different period than when the payments were recorded?
• How were the financial statements impacted in 2010 and 2011?

2. Were there any other things happening in the company that could have had a part in this?

3. How was this case of fraud found? Who found it? What are some steps that could have been taken that may have prevented this? What changes did this company make in order to prevent this from occurring again?

4. In the end, was the Pringles line acquired?