Case 5-5 Krispy Kreme
1. In each round trip transaction, Krispy Kreme recognized additional income in an amount more or less equal to the funds that were paid back from the franchises. As a result, Krispy Kreme filed annual, quarterly, and current reports with the SEC that contained misstated financial results, failed to have books and records that accurately and fairly reflected its transactions and disposition of assets, and failed to set up and maintain internal accounting controls sufficient to provide reasonable assurances that its accounts were accurately stated in accordance with generally accepted accounting principles. 2. Top management had devoted too little attention to establishing accounting controls and an appropriate tone at the top, and too much attention to meeting earnings expectations, which strongly suggested an intention to manage earnings. Management wanted to show that their company was making money through their franchises, so that the investor would purchase more stock and allow the company to grow. 3. The ethical issues facing Krispy Kreme for revenue recognition according to the theories (utilitarianism, rights and justice) that we have learned can be describes as: Utilitarianism: Krispy Kreme violated this theory due to the revenue that was recorded was never earned in this time period. Rights Perspective: The way Krispy Kreme accounted for the incorrect revenue, violated the rights of their shareholders since it was a public company and was on the NYSE, it did not give the correct view of the company has a whole to those who had invested in the company. Justice: Krispy Kreme has the obligation to report correct and accurate information on their financial statements to shareholders and the public. By recognizing the revenue too early, when the revenue was not earned yet, Krispy Kreme did not provide a true and accurate picture of the company as a whole; investors need to know correct information in order to make accurate and...
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