Starbucks Red Flags of Fraud

Topics: Starbucks, Coffee, Revenue Pages: 7 (2320 words) Published: April 17, 2013
Starbucks Coffee Company
Stephanie Deacon
Colorado Technical University Online: ACCT 320-1203A-01
Professor White
6 August 2012

This paper will provide an overview of Starbucks Coffee Company and identify seven red flags of possible fraudulent behavior within the organization. Steps to design a fraud prevention program will also be discussed based on the identified red flags.

Starbucks Coffee Company opened its first store in Seattle, Washington in 1971 offering fresh-roasted whole bean coffees. “Howard Schultz (Starbucks chairman, president and chief executive officer) joined Starbucks in 1982 as director of retail operations and marketing. Starbucks begins providing coffee to fine restaurants and espresso bars” (Starbucks, 2012). In 1985, ``Howard founds Il Giornale, offering brewed coffee and espresso beverages made from Starbucks coffee beans`` (Starbucks, 2012). Two years later Howard Schultz purchases Starbucks assets with the help of local investors and Il Giornale changes its name to Starbucks Corporation and stores open in Chicago and Vancouver, Canada increasing the total number of stores to 17. Starbucks currently has over 16,000 stores in 50 countries and considers the company ``the premier roaster and retailer of specialty coffee in the world`` (Starbucks, 2012). Starbucks mission statement is `` to inspire and nurture the human spirit-one person, one cup, and one neighborhood at a time`` (Starbucks, 2012). Starbucks refers to their employees as partners and their focus is to create a workplace that values and respects people from diverse backgrounds and to conduct business in an ethical manner. Starbucks has a business and ethics compliance program in place to help ensure that all employees make ethical decisions in the workplace. In addition to its retail outlets, the Starbucks brand of gourmet coffees, ready to drink Frappuccino and double shot drinks and ice creams are also sold in grocery and convenience store outlets. Starbucks total net revenues as of ``fiscal year ending Oct 2, 2011 was $11,700.4 (in millions) which was an increase from both 2010 fiscal year end of $10,707.4 and $9,774.6 from 2009 respectively`` (Starbucks Annual Report, 2012). As of ``three quarters ended July 1, 2012, Starbucks unaudited net revenue was $9,935.4 (millions), up from $8,668.7 from July 3, 2011.

Seven red flags of possible fraud
Starbucks appears to have a good tone at the top with its established core values; however there can be instances of fraud going undetected by the auditors due to management’s override of controls. For example, with concerns about competition in the market, upper management could engage in creating fictitious revenues to make Starbucks look as if the company was performing better than it actually is. “McDonald’s 2011 annual revenues were $27.01 billion” (Hoovers, 2012) in comparison to Starbucks $11.70 billion and since McDonald’s introduced the McCafe line in 2009 to compete with Starbucks, it has captured a sizeable portion of the coffee drinker’s market. According to Keith O’Brien from the New York Times, “beverages, thanks to smoothies and espresso drinks, are now a $9 billion annual business for McDonald’s in the United States” (O’Brien 2012). This type of competition could pressure Starbucks management to inflate the company’s earnings and one key area where this could be accomplished is with improper revenue recognition. Starbucks sells store valued gift cards called Starbucks cards where customers load money on the cards for future use in any participating Starbucks location. “Revenues from…stored value cards, primarily Starbucks Cards, are recognized when redeemed, or when we recognize breakage income” (Starbucks Annual Report, 2011). Breakage income is typically recognized when the redemption of the cards is likely to be remote based on past history. Outstanding card balances are included in deferred revenue...

References: AICPA. (2012). AU Section 316 Consideration of Fraud in a Financial Statement Audit.
Retrieved from
Starbucks. (2012). Starbucks Annual Report. Retrieved from
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