Diamond Foods is facing a formal investigation by the
SEC and federal prosecutors as to whether certain financial practices
involved criminal fraud. The investigation revolves around how
the company made crop payments to walnut growers. In response,
Diamond engaged an audit committee to conduct an internal inquiry
into the allegations.
Diamond made sizable payments to its walnut growers in
September that they claimed were an advance on their 2011 crop.
However, three walnut growers allege that they told Diamond that they
did not intend to deliver their 2011 crops to Diamond but were
assured by company representatives that they could cash the checks
anyway. Some critics believe the payments were used to inflate
last year’s earnings by shifting costs into the current year.
Diamond’s fiscal year ends in July so the September payment shifted
the costs into the 2012 accounting year. Diamond contended that
these “momentum payments” were made in an effort to optimize cash
flow for growers and initially denied that these payments were compensation
for last year’s crop.
Because of the investigation, Diamond has
announced that its plans to acquire Pringles from Proctor &
Gamble are on hold. Diamond planed to pay most of the purchase
price by issuing its stock to Proctor and Gamble shareholders.
The deal, which was initially valued at $2.35 billion, is now valued
at $2 billion based on Diamond’s current stock price. The
company’s stock price was trading around $96 in September are now
trading around $33.
Thus far, Diamond has cooperated fully with the
investigation. The investigation has also opened Diamond up to
several securities class-action lawsuits.
More recently, the audit committee for the company
conducted the internal probe on the accounting treatment of the
walnut payments. It concluded that approximately $20 million
“continuity” payments made to growers in August, 2010 and
approximately $60 million “momentum” payments made in September
2011 were not properly accounted for in the correct periods.
Furthermore, the audit committee identified material weaknesses in
Diamond’s internal control over financial reporting.
In response to these findings, Diamond’s Board of
Directions has taken several corrective actions such as appointing a
new Chief Executive Officer and Chief Financial Officer.
Diamonds will restate its 2010 and 2011 financial statements.
Investigators are now likely to review Diamond’s
accounts very carefully because accounting violations are rarely an
isolated incident. Diamond is also likely to face a civil
enforcement action by the SEC for failure to maintain accurate books
and records and failure to maintain adequate internal controls.
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