Diamond Foods, a nut and snack food company, was founded in 1912 by a group of cooperative nut growers, known as California Diamond. Over the years, Diamond Foods grew primarily through the acquisition of other brands, including Pop Secret, Kettle Foods, and Harmony Foods. It also introduced another line of nut products under its Emerald brand. The company is currently

Sep 8, 2023

Diamond Foods, a nut and snack food company, was founded in 1912 by a group of cooperative nut growers, known as “California Diamond.” Over the years, Diamond Foods grew primarily through the acquisition of other brands, including Pop Secret, Kettle Foods, and Harmony Foods. It also introduced another line of nut products under its Emerald brand. The company is currently owned by Snyder’s-Lance, Inc. and is headquartered in Charlotte, North Carolina.

Snyder’s-Lance, Inc. bought the company for $1.91 billion in a cash-and-stock deal following an SEC investigation. In addition to Diamond, Snyder’s-Lance, Inc.’s product line includes Cape Cod, Lance, Tom’s, eatsmart, Stella D’oro, Krunchers!, Late July, Archway, O-Ke-Doke, Pretzel Crisps and Jay’s brands. . There are currently 6,400 full-time employees and numerous notable competitors such as Kellogg’s, USA, Frito-Lay, USA Inc., and Mondelez International, Inc.

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Diamond Foods, a nut and snack food company, was founded in 1912 by a group of cooperative nut growers, known as California Diamond. Over the years, Diamond Foods grew primarily through the acquisition of other brands, including Pop Secret, Kettle Foods, and Harmony Foods. It also introduced another line of nut products under its Emerald brand. The company is currently
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Brian Driscoll was named Chairman and CEO of Snyder’s-Lance, Inc. in June 2017. He had previously been Chairman and CEO of Diamond Foods, a role he assumed after its former Chairman and Chief Financial Officer were fired due to the Diamond scandal in which financial reports were falsified. The scandal originated in 2005 under the leadership of the previous president and CEO, Michael Mendes. His business philosophy was “Bigger is Better,” which ultimately led to a corporate culture of poor judgment and fraud. As part of his growth strategy, he obtained millions in loans to finance the acquisition of Pop Secret. He later tried to buy Pringles from Procter and Gamble (P&G). If the merger had been successful,

In 2011, Mark Roberts, an analyst with Off Wall Street Consulting Group, raised questions about Diamond’s accounting practices. He accused Diamond of misreporting his payment to providers. Diamond would pay growers in September for nuts delivered in Diamond’s 2011 fiscal year, which had already ended in July. This significantly affected Diamond’s financial statements, which, if done intentionally, would be illegal. Initially, Diamond denied any irregularities, arguing that the payments were in advance of the future 2012 harvest and had nothing to do with the previous year’s harvests.

The growers disputed this claim, arguing that they were told the payments were, in fact, from the previous year. Investigations revealed that these payments were made to inflate fiscal year 2011 results by shifting costs into the next year. An internal investigation found that CEO Michael Mendes and CFO Steven Neil had consistently mis accounted for producer payments in 2010, 2011 and 2012. They skewed Diamond’s financial results, reporting an EPS of $2.61 when the correct number was $1.14. As a result, they took home millions of dollars in additional compensation.

The “enhanced” EPS resulting from the accounting fraud was, in part, an attempt to follow Mendes’s aggressive philosophy and acquire Pringles from P&G. Diamond needed to improve financial performance at all costs to meet the conditions set out in the loan agreements and seal the deal. One of those conditions required higher performance standards for factors affecting management compensation. Higher reported earnings would allow for higher compensation. The incorrect accounting of earnings was an attempt by management to mislead lenders about Diamond’s true earnings. Another ethical concern raised at the time was the fact that Diamond’s CFO held a seat on the company’s board of directors,

The company was subsequently investigated for criminal fraud and a new audit was conducted. This also disrupted the Pringle acquisition process. Additionally, Diamond had difficulty meeting financial reporting deadlines. Their fraud was the result of a lack of quality controls and senior management’s inability or unwillingness to set proper ethical standards, which encouraged more unethical behavior by employees. For example, after payment irregularities were discovered, Diamond’s management denied the claims, insisting that the system worked to “optimize cash flow for growers.”

Share prices fell to a six-year low of $12.50. The lower share price was a result of updated historical financial results as well as current year performance. The updated financial results removed $56.5 million in previously reported gains due to accounting fraud. The price decline was also affected by rumors that billionaire investor and activist David Einhorn was shorting the stock. The combination increased investor uncertainty about Diamond’s future profitability, and Pringle’s deal with P&G was lost.

Following the SEC investigation, Mendes and Neil were placed on administrative leave. Subsequently, Mendes resigned and Neil was fired. Mendes did not receive promised insurance benefits because his resignation was considered a breach of his duty as CEO. He was required to return the 6,665 Diamond common shares he received for fiscal 2010 and to also repay the company its 2010 and 2011 bonuses, which totaled $2,743,400. This amount was taken from his Retirement Restoration Plan, but he still received a payment of $2,696,000.

After reaffirming its earnings, the company still faced risks of litigation, regulatory proceedings, government enforcement, and insurance claims. The SEC imposed a $5 million fine as a remedy to the fraud allegations. The SEC charged Neil with misrepresenting the costs of the nuts and Mendes for his role in the misleading financial statements. Mendes lost $4 million in bonuses and benefits and also paid a $125,000 fine. Although Mendes was not proven to have participated in the scheme, regulatory authorities believed that he should have known about Diamond’s incorrect financial statements. Neil initially fought the SEC charges, but settled by paying a civil penalty of $125,000. Investors filed lawsuits against Diamond due to misrepresentation of its financial situation; Diamond Foods reached a settlement of 100 million dollars.

When Brian Driscoll took over Diamond, he outlined his strategic plan for the company to overcome its ethical lapses. He started with improving internal controls over financial statements. Six new directors were appointed to strengthen the board of directors. A forward-looking risk statement was issued, which identified issues that may arise in the future. It included the Company Code of the Conduct and Ethics Policy, and a statement on the responsibility of senior management to set the right tone for the organization.

Replaced the CFO and installed new company financial reporting processes where management approval was required for material and non-routine transactions. Ethics training, led by the CFO, reinforced proper accounting procedures and employee training. Led to a better understanding of financial reporting integrity and ethical expectations. He modified the nut cost estimation policy and added entries each quarter, which needed to be reviewed and approved by cross-functional management. His efforts fostered better documentation and oversight of accounting procedures and better communication with suppliers. A Grower Advisory Board was introduced to receive input from growers and improve communication between growers and the company. Diamond followed Sarbanes-Oxley’s internal control policies related to grower accounting procedures.

Controls over accounts payable and invoice processing were reviewed. A third party report known as the “Integrated Internal Control Framework” evaluated the effectiveness of its internal controls. Reporting controls were put in place and this improved communication, allowing for greater transparency. These new controls allowed the company to escape bankruptcy and restore shareholder confidence, ultimately leading to the merger of Snyder’s-Lance, Inc. Under the leadership of Brian Driscoll, Snyder’s-Lance, Inc. has a Code of Ethics of Conduct with questions and answers on the website.

What were the organizational culture factors that caused accounting misconduct and fraud?

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