Content area
Full Text
The SEC charged two former executives of Diamond Foods, Inc., with the falsification of quarterly and annual results for fiscal years 2010 and 2011. Their punishment was a slap on the wrist compared to what they should have received.
The Securities & Exchange Commission (SEC) Annual Financial Report for fiscal 2013 shows that total penalties and disgorgement ordered totaled $3.4 billion, an increase from the prior fiscal year. According to SEC Chair Mary Jo White, the SEC's "robust enforcement program" is aggressive and creative and will continue to focus on financial statement and accounting fraud. Despite these positive assertions, SEC penalties don't seem to be sufficient to deter future wrongdoing.
In a recent egregious case, investors of Diamond Foods, Inc., suffered significant losses because of the deliberate falsification of quarterly and annual results at the company. "Diamond Foods misled investors on Main Street to believe that the company was consistently beating earnings estimates on Wall Street," said Jina Choi, director of the SEC's San Francisco, Calif., regional office. "Corporate officers cannot manipulate fiscal numbers to create a false impression of consistent earnings growth." Despite these strong words, the SEC assessed a penalty of only $5 million against Diamond, which is listed on NASDAQ with fiscal year 2013 revenues of $864 million.
Management's rationale for engaging in the accounting scandal was the perceived absolute necessity to continue to beat Wall Street estimates. In April 2011, Diamond management decided to acquire the Pringles brand from Procter & Gamble and needed to maintain its strong earnings performance in order to pull offthe acquisition. The company had previously seen earnings increase from $0.53 per share in 2007 to $1.42 in 2009.
Before going public in 2005, Diamond was predominantly a cooperative of walnut growers. Its most important business and accounting issue each year dealt with the walnut price paid to growers, which easily provided the most feasible means to falsify earnings. The fiscal 2011 10-K annual report to the SEC stated a critical accounting policy:
"We have entered into longterm Walnut Purchase Agreements with growers, under which they deliver their entire walnut crop to us during the Fall harvest season and we determine the minimum price for this inventory by March 31, or later, of the following calendar...