Krispy Cream

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Krispy Kreme Dougnuts: Empty Calories or Empty Profits?
Case Study of the Impact of Sarbanes-Oxley Act ("SOX")

Krispy Kreme Doughnuts (KKD), a once high flying growth stock has been hampered as of late with shareholder lawsuits. When sales growth and earnings began to drop significantly in 2003, the company blamed its problems on the popularity of low-carbohydrate diets like Atkins and South Beach at the time. But the SEC began probing Krispy Kreme's accounting for franchise buybacks and is now facing shareholder lawsuits for inflating profits. Senior management officials allegedly knew of the problems, but continued to pad sales figures by doubling doughnut shipments to wholesale customers at the end of fiscal quarters, according to
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The witness "understood that it was commonplace at Krispy Kreme to channel stuff in order to meet Wall Street expectations," according to the complaint.

Some could also argue that Krispy Kreme auditors Price WaterHouse-Coopers (PWC) should have noticed a pattern of large shipments at the end of the year with corresponding credits the following fiscal year during the course of their audit. Typical audit procedures would be to confirm with KKD's customers their purchases. In addition monthly variations analysis should have led someone to question the spike in doughnut shipments at fiscal year end.

Accounting Irregularities:

The SEC is investigating if Krispy Kreme used questionable methods to inflate profit when it bought back its Michigan franchise for $32.1 million last year. PWC refused to sign off on quarterly results. It was only after the firm retained the services of outside legal counsel to verify the methodology that Krispy Kreme was allowed to put the matter behind them. The outcome of the SEC investigation is still pending.

If PWC were not already under scrutiny for failing to detect inflated sales, PWC may have considered signing off on the accounting methodology based on immateriality. However, under SOX accountability and reporting requirements, Price WaterHouse had a profession and legal obligation to bring forth publicly, any

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