On November 1, 2011, Diamond Foods Inc.’s (NASDAQ: DMND) unexpectedly disclosed serious discrepancies (possible understatement of accounts payable) regarding its 2011 financial statement reports and as a result announced its decision to delay its acquisition of the Pringles snack business from Procter & Gamble Company (P&G) (NYSE: PG). Naturally, the November 1, 2011 confession caused an immediate plunge of Diamond Food’s stock price, but worse, it triggered several lawsuits from furious investors and created rumors about the future viability of the company. The purpose of this study is to determine the facts and critically analyze the cause and effect of Diamonds Food’s allegedly financial statement fraud and attempt to make a prediction about the future of this company.
Allegations of Diamond Foods Inc.’s’ Understatement of Accounts Payable
Diamond Foods’ core competency is in its innovative food packaging methods and marketing abilities. The company which brands includes; Kettle Brand Potato Chips, Emerald Premium Snacks, Pop Secret Popcorn, and Diamond Culinary Nuts, was clearly in an expansionary mode prior to its November 1, 2011 financial statement revelations. For example, in his 2010 letter to Diamond stakeholders, the Chairman, President and Chief Executive Officer, Michael J. Mendes, announced that “Diamond Foods had a transformational year in 2010…with strong growth and profitability in the core business…the company acquired and successfully integrated the global operations of Kettle Foods…once again generated record earnings while continuing to invest in brands, innovation, operational infrastructure and people” (p. 1).
Undoubtedly, in the last couple of years, Diamond was on a clear trajectory to significantly expand its market share by acquiring other snack food companies. According to a recent comment published in Barron’s Magazine (2011, November 5), “on April, 2011 Diamond Foods took on an even bigger bite by announcing its plans to acquire the Pringles chips business from P&G in exchange for Diamond stock” (p. 1). Diamond’s growth in the past couple of years is truly impressive. Table 1 shows Diamonds net sales growth by product from 2008 through 2010.
Table 2 shows the remarkable increase of Diamond stock especially from October 2010 to October 2011. At its peak, Diamonds stock traded at $95, more than double what it is trading today. Prior to Diamonds’ November 1, 2011 announcement its key financial performance measures were impressive; for example, its Price/Earnings ratio was $23.3, and its Earnings per Share was at 2.23.
Unfortunately, in its aggressive pursuit to increase its market share by acquiring companies of similar product, Diamond may have also created the conditions conducive to fraud, as illustrated in the Fraud Triangle. According to the Public Company Accounting Oversight Board (PCAOB), the “three key components that make up the Fraud Triangle are; perceived pressure, perceived opportunity and rationalization”.
The cliché that “leaders are responsible for everything that happens or fails to happen in an organization” certainly applies to the Diamond Food story. The two most influential individuals within the Diamond Foods’ leadership structure are Michael J. Mendes, Chairman, President and Chief Executive Officer; and Steven M. Neil, Executive Vice President, Chief Financial and Administrative Officer.
Michael J. Mendes, President and CEO
Mendez joined Diamond in 1991. He holds an M.B.A. degree from the Anderson School of Management at the University of California, Los Angeles. Mendez assumed the duties and responsibilities of President and CEO for Diamond in 1997. The immediate impression is that Mendez has an incredible amount of knowledge and...