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Diamond Foods Accounting Scandal

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Diamond Foods Accounting Scandal

BACKGROUND:
Founded in 1912 as a walnut grower cooperative, Diamond Food’s primary business involved buying walnuts from local California growers, processing the product, and reselling it. The San Francisco-based company converted from a cooperative to a public corporation in July of 2005, issuing its initial shares for $17. By 2010, Diamond Foods (DMND) had expanded and acquired a number of snack food companies including Kettle Brand® Chips and Pop Secret® popcorn and was negotiating the acquisition of the Pringles brand from the Procter & Gamble Company (Diamond Foods, 2014). The addition of the Pringles brand would make Diamond the second-largest global snack foods company behind PepsiCo, Inc.,
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The details of how these costs were pulled apart and separated will be further explained in the following section.

From the beginning Diamond had put a focus on the commodity walnut market. The company had forged strong relationships with the growers of the nuts and held pride in continuing the positive relationship throughout the future of the company. So as the growers began to hand down larger costs, Diamond needed to find a way to ensure that the growers got the full amount they were seeking in order to keep ties strong and avoid the growers leaving Diamond for one of its competitors, while also continue to meet the earnings per share (EPS) expectations. According to the case filed by the SEC in 2014, “In February 2010, Diamond CFO Neil instructed members of the Finance Team to adjust the walnut costs to hit an EPS target for the second quarter. “Members of the Finance Team provided Neil with a walnut cost estimate that would result in reported EPS that would be higher than the consensus analyst of estimated $0.47 per share for the quarter” (SEC, 2014). However, the growers were not satisfied with this method of determining prices and threatened to leave Diamond if full costs were not received. Neil determined a way to close the gap through “continuity” or “momentum” payments. This technique allowed Diamond to pay the full amount that the growers were giving, but separated the costs out. Diamond only the portion on the financial
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