***This is all the info given for the questions, please answer as best as can be answered***

***This is all the info given for the questions, please answer as best as can be answered***

Paragraph Styles form of earnings management. But use of AM is limited because of the reversing nature of accruals. RTM generally follows AM but is more costly than AM because it impacts the company's long-term performance. In addition, companies will eventually run out of RTM opportunities and either stop managing earnings or transition to the most costy form of earnings management.16 Companies use non-GAAP earnings management because it is difficult to detect and enables large-scale changes to reported earnings. Yet Sher argues that non-GAAP earnings management is the most costly form of managing earnings because of legal fees and capital market costs once the GAAP SAGE SASE Business Cases 2014 IMA Educational Case Journal. All rights reserved. Page 5 of 10 Diamond Foods, Inc. violation has been revealed. Therefore, non-GAAP earnings management is generally the last method used to manage earnings. Auditors have the responsibility to conduct their audit to provide reasonable assurance that there are no material misstatements in the financial statements. This responsibility includes ascertaining that any earnings management" techniques do not violate GAAP. The Auditors Neil approved the walnut cost and determined the accounting for walnut payments. He supervised Diamond's finance and accounting team ("finance team") and the team that managed relationships with growers ("grower relations team"). As the CFO, Neil directly interacted with Diamond's external auditors. Neil prepared an internal memorandum each quarter that justified the quarterly estimated cost of walnuts and a memorandum to the external auditors that justified the final walnut costs. The SEC notes that the auditors relied on the memos when issuing their opinions about Diamond's financial statements.17 Fiscal Year 2010 During the audit of the 2010 financial statements, the auditors asked Neil for information to justify his decision to account for the "continuity" payment as an advance on the next year's crop of walnuts. The SEC contends that Neil made material misrepresentations to the auditors and withheld material information from them. Specificaly, he falsely stated that walnut growers had asked for an advance payment for next year's crop and omitted the fact that he and other Diamond representatives had assured growers a competitive price for the current year.18 Further, the auditors relied on a "management representation letter" that Neil signed, which stated that the "continuity payment was for the 2010 crop and did not represent a payment for 2009 walnut costs. Mendes was cognizant of representations made to the external auditors and signed the related management representation letter related to the 2010 financial statements audit.19 Fiscal Year 2011 Neil continued to manipulate walnut costs during fiscal year 2011. In e-mails, Neil referred to the walnut costs as a "lever" to manage earnings in Diamond's quarterly financial statements. As a result of the cost manipulations, Diamond reported EPS that met or exceeded analysts expectations for every quarter in 2011It should be noted that Diamond's stock price was central to a proposed acquisition of a major potato chip business unit in spring 2011.20 The company's stock price reached approximately 592.50 per share in September 2011. Epilogue Diamond Foods As a result of media speculation of accounting irregularities and an internal investigation, Diamond Foods issued restatements on November 14, 2012. Around the time of the announcement, the price of Diamond's stock declined to approximately $15.40 per share. Educational Case Journal. All rights reserved. Diamond Foods, Inc., without admitting or denying the allegations, agreed to pay $5 million to settle the charges filed against it by the SEC.21 Diamond also consented to the entry of a permanent injunction against future violations of the relevant securities laws.22 Michael Mendes Michael Mendes, Diamond's former CEO, agreed to settle charges against him by paying a civil money payment of $125,000 to the SEC and agreeing to "cease and desist" from committing or causing any future violations of Sections 17(a)(2) and (a3) of the Securities Act as well as other Sections and Rules of the Exchange Act.23 In addition, Mendes returned or forfeited more than $4 million in bonuses and other benefits he received as a result of Diamond's allegedly fraudulent financial reporting 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. 1. 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? Provid e as many possible reasons you can think of 2. 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 IMAe (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? 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 client's management? Cost/Managerial Accounting Questions: 7. How could management accounting tools, such as variance analysis, benchmarking, and Cost-Volume-Profit analysis, have been used to highlight Diamond's 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 Diamond's CFO? 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 client's management? Cost/Managerial Accounting Questions: 7. How could management accounting tools, such as variance analysis, benchmarking, and Cost-Volume-Profit analysis, have been used to highlight Diamond's 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 Diamond's CFO? Paragraph Styles form of earnings management. But use of AM is limited because of the reversing nature of accruals. RTM generally follows AM but is more costly than AM because it impacts the company's long-term performance. In addition, companies will eventually run out of RTM opportunities and either stop managing earnings or transition to the most costy form of earnings management.16 Companies use non-GAAP earnings management because it is difficult to detect and enables large-scale changes to reported earnings. Yet Sher argues that non-GAAP earnings management is the most costly form of managing earnings because of legal fees and capital market costs once the GAAP SAGE SASE Business Cases 2014 IMA Educational Case Journal. All rights reserved. Page 5 of 10 Diamond Foods, Inc. violation has been revealed. Therefore, non-GAAP earnings management is generally the last method used to manage earnings. Auditors have the responsibility to conduct their audit to provide reasonable assurance that there are no material misstatements in the financial statements. This responsibility includes ascertaining that any earnings management" techniques do not violate GAAP. The Auditors Neil approved the walnut cost and determined the accounting for walnut payments. He supervised Diamond's finance and accounting team ("finance team") and the team that managed relationships with growers ("grower relations team"). As the CFO, Neil directly interacted with Diamond's external auditors. Neil prepared an internal memorandum each quarter that justified the quarterly estimated cost of walnuts and a memorandum to the external auditors that justified the final walnut costs. The SEC notes that the auditors relied on the memos when issuing their opinions about Diamond's financial statements.17 Fiscal Year 2010 During the audit of the 2010 financial statements, the auditors asked Neil for information to justify his decision to account for the "continuity" payment as an advance on the next year's crop of walnuts. The SEC contends that Neil made material misrepresentations to the auditors and withheld material information from them. Specificaly, he falsely stated that walnut growers had asked for an advance payment for next year's crop and omitted the fact that he and other Diamond representatives had assured growers a competitive price for the current year.18 Further, the auditors relied on a "management representation letter" that Neil signed, which stated that the "continuity payment was for the 2010 crop and did not represent a payment for 2009 walnut costs. Mendes was cognizant of representations made to the external auditors and signed the related management representation letter related to the 2010 financial statements audit.19 Fiscal Year 2011 Neil continued to manipulate walnut costs during fiscal year 2011. In e-mails, Neil referred to the walnut costs as a "lever" to manage earnings in Diamond's quarterly financial statements. As a result of the cost manipulations, Diamond reported EPS that met or exceeded analysts expectations for every quarter in 2011It should be noted that Diamond's stock price was central to a proposed acquisition of a major potato chip business unit in spring 2011.20 The company's stock price reached approximately 592.50 per share in September 2011. Epilogue Diamond Foods As a result of media speculation of accounting irregularities and an internal investigation, Diamond Foods issued restatements on November 14, 2012. Around the time of the announcement, the price of Diamond's stock declined to approximately $15.40 per share. Educational Case Journal. All rights reserved. Diamond Foods, Inc., without admitting or denying the allegations, agreed to pay $5 million to settle the charges filed against it by the SEC.21 Diamond also consented to the entry of a permanent injunction against future violations of the relevant securities laws.22 Michael Mendes Michael Mendes, Diamond's former CEO, agreed to settle charges against him by paying a civil money payment of $125,000 to the SEC and agreeing to "cease and desist" from committing or causing any future violations of Sections 17(a)(2) and (a3) of the Securities Act as well as other Sections and Rules of the Exchange Act.23 In addition, Mendes returned or forfeited more than $4 million in bonuses and other benefits he received as a result of Diamond's allegedly fraudulent financial reporting 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. 1. 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? Provid e as many possible reasons you can think of 2. 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 IMAe (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? 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 client's management? Cost/Managerial Accounting Questions: 7. How could management accounting tools, such as variance analysis, benchmarking, and Cost-Volume-Profit analysis, have been used to highlight Diamond's 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 Diamond's CFO? 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 client's management? Cost/Managerial Accounting Questions: 7. How could management accounting tools, such as variance analysis, benchmarking, and Cost-Volume-Profit analysis, have been used to highlight Diamond's 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 Diamond's CFO