Krispy Kreme Doughnuts, Inc. Essay

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This case involves the improperly represented earnings by Krispy Kreme Doughnuts, Inc. during the fourth quarter of fiscal year (FY) 2003 and each quarter of FY 2004. The company used improper accounting methods to avoid lowering its earnings during that period. Krispy Kreme also fraudulently reported its earnings per share (EPS) throughout that time, which exceeded the previously stated EPS by 1 percent. An agreement to settle the charges against Krispy Kreme was reached on March 4, 2009 when the Securities and Exchange Commission (SEC) issued a cease-and-desist order.
The SEC cited Krispy Kreme for three round-trip transactions, which involved the company paying money to a franchise with an understanding that the franchise would later repay the money in a planned method. This would allow Krispy Kreme to record extra pretax income in an amount that was nearly equal to the money that was initially paid to the franchisee. The first transaction resulted in additional net income of $365,000 after taxes. The second resulted in overstatement of $310,000 after taxes, while the third resulted in an overstatement of $361,000 after taxes.
Further accounting anomalies were discovered during the testimony of a former sales manager at a store in Ohio. A regional sales manager instructed that double orders would be sent out on the last Friday and Saturday of FY 2004 to increase the sales of Krispy Kreme in the fiscal year to meet the projections of Wall Street. The unneeded doughnuts

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