This document summarizes the accounting scandal at Diamond Foods that occurred in 2011-2012. Diamond Foods improperly accounted for payments to walnut growers, misstating earnings over multiple years. When the accounting issues came to light, it reduced reported earnings significantly and the stock price dropped over 50%. An investigation found payments of $20 million and $60 million that were recorded in incorrect periods, violating accounting rules. Several factors contributed to unethical behavior at Diamond Foods, including pressure to meet debt agreements and incentives to hit high performance targets.

1. Presented By: David F. Smith
Spalding University
April 23, 2014
http://thestockmarketbasics.com/2013/10/01/october-
1st-2013-financial-earnings-release-alerts/
Diamond Foods, Inc. (DMND)

2. Introduction Part One
• Founded in 1912 with a strong heritage under the Diamond of
California brand.
• Diamond Foods has five premium product lines: Potato Chips,
Popcorn, Snack Nuts, Inshell Nuts, & Culinary Nuts
• Brands include Kettle Brand® Chips, Emerald® snack nuts,
Pop Secret® popcorn, and Diamond of California® nuts.
• Approximately around 1,700 year round employees.
• Diamond Foods completed its initial public offering in July,
2005.

3. Introduction Part Two
(Diamond Foods Inc., 2013)

4. (2014) Balance Sheet Part One
Yahoo Finance

5. (2014) Balance Sheet Continued
(http://finance.yahoo.com/q/bs?s=DMND)

6. (5 Year) Stock Market Performance
• Purple line – DOW
• Red line – NASDAQ
• Green line – S&P 500 index
• Blue line – DMND
(http://finance.yahoo.com/q/bc?s=DMND&t=5y&l=off&z=l&q=b&c=%5EGSPC%2C%5EIXIC%2C%5EDJI)

7. 20 and 200 day moving average over a 2-year time horizon
(Diamond Foods Inc., 2013)

8. (Diamond Foods Inc., 2013)

9. (2014) Major Stock Holders
(http://finance.yahoo.com/q/mh?s=DMND+Major+Holders)

10. (2014) Major Stock Holders Part Two
(http://finance.yahoo.com/q/mh?s=DMND+Major+Holders)

11. (Diamond Foods Inc., 2013)

12. (Diamond Foods Inc., 2013)

13. DIAMOND FOODS STAKEHOLDERS

14. (http://ediscoverytimes.com/wp-content/uploads/2012/08/Presentation1.jpg)

15. Manufacturing Locations:
-Guess What Location Is NOT Displayed & WHY
(file:///C:/Users/KASE/Downloads/April%202013%20Investor%20Presentation%20FINAL%20(2).pdf)

16. Employees for Diamond Foods
(https://www.comstocksmag.com/sites/default/files/0413_China_marketing_secondary.jpg)

17. Union Employees & Diamond Foods
(http://www.holtlaborlibrary.org/images/lg%20Walnuts.JPG )
“Diamond Walnut's displaced work force is 70 percent
women, 50 percent Hispanic, 15 percent black and 15
percent Indian or Pakistani, the Teamsters say.”
(http://www.holtlaborlibrary.org/LaborButtons.html )

18. (Diamond Foods Inc., 2013)

19. 20 and 200 day moving average over a 2-year time horizon
(http://www.compliancebuilding.com/wp-content/uploads/2009/11/goals-warning.png)

20. The Man Who Wanted More Than Walnuts
(http://www.nasdaq.com/reference/200702/mo_020107a.jpg)
Diamond Foods CEO Michael Mendes presides over the Market Open
Thursday, February 1, 2007 at NASDAQ's MarketSite in New York City.
(http://www.nasdaq.com/reference/200702/market_open_020107.stm)

21. WARNINGDiamond Foods Ethical Fiasco
(http://www.replicals.com/product_info.php?manufacturers_id=15&products_id=726&osCsid=qe7aiha7vphl1s394a0n89r6s)
2

22. The Power of One Man’s Walnuts
CREDIT: REUTERS/ROBERT DURELL (UNITED STATES - TAGS: AGRICULTURE BUSINESS)
• Walnut grower Matt Conant stands in his walnut grove in Rio Oso, California
February 23, 2012. ''There's a lot of uncertainty right now,'' says Conant, a walnut
grower, former supplier to Diamond Foods and district director of the California
Farm Bureau Federation. An accounting scandal over the payments made by the
largest U.S. walnut processor Diamond Foods Inc to its growers has hurt their
confidence in the company.
• Picture taken February 23, 2012. (http://www.reuters.com/article/2012/03/19/us-diamond-tax idUSBRE82I0AQ20120319)

23. How People Found Out
• “The case arose in September 2011, when Douglas
Barnhill, an accountant who is also a farmer of 75
acres of California walnut groves, got a mysterious
check for nearly $46,000 from Diamond. Barnhill
contacted Eric Heidman, the company’s director of
field operations, on whether the check was a final
payment for his 2010 crop or pre-payment for the
2011 harvest.” (http://www.ethicssage.com/2013/02/accounting-for-nuts.html)

24. How People Found Out Part Two
• “Diamond growers are paid in installments, with the final
payment for the prior fall’s crops coming late the following
year. Though it was September 2011, Barnhill was still
waiting for full payment for the walnuts he had sent
Diamond in 2010. Heidman told Barnhill that the payment
was for the 2010 crop, part of fiscal 2011, but that it would
be “budgeted into the next year.” (http://www.ethicssage.com/2013/02/accounting-for-nuts.
html)

25. What They Did to Give It Away
• “Nick Feakins, a forensic accountant, noted the
relentless climb in Diamond’s profit margins including
an increase in net income as a percent of sales from
1.5 percent in fiscal 2006 to more than 5 percent in
fiscal 2011.” (http://www.ethicssage.com/2013/02/accounting-for-nuts.html)
• “According to Feakins, “no competitors were
improving like that; even with rising Asian demand…it
just doesn’t make sense.” Reuters did a review of 11
companies listed as comparable organizations in
Diamond’s regulatory filings and found that only one,
B&G Foods, which made multiple acquisitions, added
earnings during the period.” (http://www.ethicssage.com/2013/02/accounting-for-nuts.html)

26. They Made REALLY Big Promises
• “Another red flag was that while net income growth is generally
reflected in operating cash flow increases, at Diamond the cash
generation was sluggish in fiscal 2010 when earnings were
strong. This raises questions about the quality of earnings.
Also, in September 2010 Mendes had promised earnings per
share growth of 15 percent to 20 percent per year for the next
five years.” (http://www.ethicssage.com/2013/02/accounting-for-nuts.html)
• “In fiscal 2009, 2010, and 2011, $2.6 million of Mendes’ $4.1
million in annual bonus was paid because Diamond beat its
EPS goal, according to regulatory filings.”
(http://www.ethicssage.com/2013/02/accounting-for-nuts.html)

27. When Diamond Foods Got Caught
• “On November 14, 2012, Diamond Foods Inc.
disclosed restated financial statements tied to an
accounting scandal that reduced its earnings
during the first three quarters of 2012 as it took
significant charges related to improper
accounting for payments to walnut growers.”
• “The restatements cut Diamond’s earnings by 57
percent for fiscal 2011 to $29.7 million and by 46
percent for fiscal 2010 to $23.2 million. By
December 7, 2012, Diamond’s share price had
declined 54 percent during 2012.”
• http://www.ethicssage.com/2013/02/accounting-for-nuts.html
• Blog posted by Steven Mintz, aka Ethics Sage, on February 18, 2013

28. What the Audit Found in 2012
• “An investigation by the audit committee in February
2012, found payments of $20 million to walnut growers in
August 2010 and $60 million in September 2011 that were
not recorded in the correct periods. The $20 million
payments to growers in 2010 caught the eye of Diamond’s
auditors, Deloitte & Touche.”
“However, it does not seem that the auditors lived up to
their professional responsibilities in detecting and/or
reporting the fraud.”
http://www.ethicssage.com/2013/02/accounting-for-nuts.html
• Blog posted by Steven Mintz, aka Ethics Sage, on February 18, 2013

29. Diamond Made a Mix of It’s Nuts Payments
• “The problem is under accounting rules you
cannot legitimately record in a future fiscal year
an amount for a prior year’s crop. That amount
should have been estimated during 2010 and
recorded as an expense against revenue from
sale of walnuts.”
http://www.ethicssage.com/2013/02/accounting-for-nuts.
html
• Blog posted by Steven Mintz, aka Ethics Sage, on
February 18, 2013

30. Why Diamond Foods Went Walnuts in 2011
http://www.pringles.com/content/dam/pringles-site/product_categories/Favorites.jpg
Pringles Deal with Diamond Foods would
have been worth at least $2.35 billion dollars
http://www.pringles.com/en_US/products/tortillas/truly-original.html

31. Recent Challenges and Concerns
• “In 2011, a number of accounting discrepancies revealed
that the company was struggling.
• A year later Diamond Foods had a net loss of
$86,336,000 and earnings (loss) per share of $3.98.
• During 2012 the company’s stock price experienced
volatility, dropping approximately 42 percent from its peak
of about $21.50 in early November to its lowest in six
years at $12.50 in late November.
• Since this large drop, the stock price has begun to
increase once more, hitting a value of $19.18 toward the
middle of 2013.”
http://danielsethics.mgt.unm.edu/pdf/diamonds.pdf
Daniels Fund Ethics Initiative
University of New Mexico
http://danielsethics.mgt.unm.edu

32. Recent Challenges and Concerns Part Two
• “Manipulating accounting results qualifies as a type of
fraud that misleads stakeholders.
• The three points of the fraud triangle are opportunity,
motivation, and rationalization.
• Using this model, it becomes clearer how the accounting
fraud at Diamond Foods was allowed to take place.
• For instance, employees were given the opportunity to
conduct fraud as internal controls were clearly not being
implemented.
• Furthermore, top management did not set an ethical tone
at the top, giving employees even more opportunity for
unethical behavior”
http://danielsethics.mgt.unm.edu/pdf/diamonds.pdf
Daniels Fund Ethics Initiative
University of New Mexico
http://danielsethics.mgt.unm.edu

33. Several Factors Encouraged Unethical Behavior
• “Company required to take out loans to make
acquisitions possible. Diamond debt agreements
required certain performance standards to be met.
• The company had debt-to-earnings covenant in
one of its debt agreements, requiring the
company to have higher earnings.
• The debt-to-earnings covenant, increased
compensation for stakeholders for meeting higher
performance standards.
• All likely played a major role in Diamond Foods’
inaccurate financial reporting. ”
http://danielsethics.mgt.unm.edu/pdf/diamonds.pdf
Daniels Fund Ethics Initiative
University of New Mexico
http://danielsethics.mgt.unm.edu

34. Several Factors Encouraged Unethical Behavior
• “The snack food industry very competitive, but so was the company’s culture.”
• “The “bigger is better” ideology supported by then-CEO Michael Mendes”
• “Diamond Foods’ attempted acquisition of Pringles ideology led to large debts, as the company was
required to take out loans to make these acquisitions possible.”
• “Because of the loans, Diamond had debt agreements, which required certain performance
standards to be met.”
• “The company also had a debt-to-earnings covenant in one of its debt agreements, requiring the
company to have higher earnings. The debt-to-earnings covenant, increased compensation for
stakeholders for meeting higher performance standards, and the pressures to acquire Pringles likely
played a major role in Diamond Foods’ inaccurate financial reporting.”
http://danielsethics.mgt.unm.edu/pdf/diamonds.pdf
Daniels Fund Ethics Initiative
University of New Mexico
http://danielsethics.mgt.unm.edu

35. Several Factors Encouraged Unethical Behavior
• “Snack food industry very competitive, but
so was the company’s culture.”
• The “Bigger Is Better”
-CEO Michael Mendes
• “Diamond Foods’ attempted acquisition of Pringles”
http://danielsethics.mgt.unm.edu/pdf/diamonds.pdf
Daniels Fund Ethics Initiative
University of New Mexico
http://danielsethics.mgt.unm.edu

36. The Man Who Wanted More Than Walnuts
Photo: Paul Chinn, The Chronicle
Former Diamond Foods CEO Michael Mendes agreed
to pay $125,000 to settle a charge of negligence
stemming from his former company's accounting
practices.

37. The Consequence's of Bad Behaviour

38. http://www.geaugaconstitutionalcouncil.org/images/show_large_img.cfm?Unethical1.jpg

39. What the Ethical Issues Were
• “The ethical issues in this case are fairly obvious:
misleading financial results; improper accounting;
and a corporate governance system that did not
work.
• The earnings projections raise questions whether
auditors should include these projections in their
audit work.
• In accounting, they are referred to as “forward-looking”
statements and cautionary language is
assigned to the amounts.
• However, this is insufficient to protect the public in
an environment of capitalism run amok.”
http://www.ethicssage.com/2013/02/accounting-for-nuts.html
Blog posted by Steven Mintz, aka Ethics Sage, on February 18, 2013

40. “Lessons Learned From Diamond’s Pringles Fiasco”
http://www.obligation.org/wp-content/uploads/2014/03/Screen-Shot-2014-03-13-at-1.41.29-PM.png

41. “Lessons Learned From Diamond’s Pringles Fiasco”
•“Don’t Run Before You Can Walk”
•“Expect Scrutiny”
•“Agreements Matter”
•“Sellers Need to Be Wary”
•“Short-Sellers Have a Purpose”
•“C.E.O. Hubris Can Kill a Company”

42. What the Future Means for Beyond 2014
file:///C:/Users/KASE/Downloads/April%202013%20Investor%20Presentation%
20FINAL%20(2).pdf

43. QUESTIONS ????
Source: http://bushwickdaily.com/

44. References
Diamond Foods Inc. (2013, April). Diamond foods building sustainable premium brands.
Retrieved from Diamond Foods:
file:///C:/Users/KASE/Downloads/April%202013%20Investor%20Presentation%
20FINAL%20(2).pdf
http://www.holtlaborlibrary.org/LaborButtons.html
http://www.nasdaq.com/reference/200702/market_open_020107.stm
http://www.reuters.com/article/2012/03/19/us-diamond-tax idUSBRE82I0AQ20120319
http://www.ethicssage.com/2013/02/accounting-for-nuts.html