Homework case 6

ISSUES IN ACCOUNTING EDUCATION American Accounting Association Vol. 30, No. 1 DOI: 10.2308/iace-50948 2015 pp. 47–69

Diamond Foods, Inc.: Anatomy and Motivations of Earnings Manipulation

Mahendra R. Gujarathi

ABSTRACT: Diamond Foods is America’s largest walnut processor specializing in processing, marketing, and distributing nuts and snack products. This real-world case

presents financial reporting issues around the commodities cost shifting strategy used by

Diamond’s management to falsify earnings. By delaying the recognition of a portion of

the cost of walnuts acquired into later accounting periods, Diamond Foods materially

underreported the cost of sales and overstated earnings in fiscal 2010 and 2011. The

primary learning goal of the case is to help students understand the anatomy and

motivations of earnings manipulation. Specifically, students will have the opportunity to

(1) apply the FASB’s Conceptual Framework to a real-world context, (2) determine the

nature of errors and compute their numerical effects on financial statements, (3)

understand motivations for earnings management and actions needed for managing

earnings of future years, (4) explain the anatomy of financial reporting fraud by

reconstructing journal entries, (5) prepare comparative financial statements for

retroactive restatements, (6) explain the rationale for clawback provisions in

compensation contracts, and (7) understand the difference between the real and

accrual-based earnings management.

Keywords: earnings management; financial statement fraud; restatements; error correction; clawback provision; Conceptual Framework.

This company was on the verge of becoming a real global consumer-product company

with Pringles t . I always said if they could make it work, it could be a highflier. And it

worked—until it didn’t.

—RBC Analyst Edward Aaron

(Businessweek, January 12, 2012)

Mahendra R. Gujarathi is a Professor at Bentley University and Adjunct Professor at the Indian Institute of

Management, Ahmedabad.

The author thanks Professors Martha Howe, Donna McConville, Ari Yezegel, participants at the 2013 North American Case Research Association Annual Conference, the 2013 American Accounting Association Northeast Region Annual Meeting, and 2014 American Accounting Association Annual Meeting for their comments and suggestions on the earlier versions of the case. Comments and suggestions of the editor, associate editor, and two anonymous reviewers are also gratefully acknowledged.

Supplemental material can be accessed by clicking the links in Appendix A.

Published Online: October 2014

47

INTRODUCTION

D iamond Foods, Inc. (hereafter, Diamond, or the Company), is America’s largest walnut

processor specializing in processing, marketing, and distributing nuts and other snack

products (Reuters 2012). Diamond’s products are distributed globally in stores where

snacks and culinary nuts are sold. Its major processing and packaging plant is located in California, the

state that accounts for virtually the entire walnut production in the U.S. The Company has

approximately 1,700 employees and its stock trades on the NASDAQ market under the symbol DMND.

History: From Walnut Processor to Innovative Packaged-Food Company 1

Diamond began in 1912 as a member-owned agricultural cooperative association, specializing

in processing, marketing, and distributing culinary, snack, in-shell, and ingredient nuts. After

almost a century as a walnut growers’ cooperative, the Company, in an initial public offering (IPO)

in 2005, issued over eight million shares to its grower-members and six million shares to the public.

Soon after incorporation, the Company began a series of acquisitions under the leadership of its

Chief Executive Officer (CEO) Michael J. Mendes. The annual reports of the Company indicate

that Diamond acquired, in May 2006, certain assets of Harmony Foods Corporation. In September

2008, it acquired Pop Secret t , a brand of microwave popcorn products, for $190 million cash from

General Mills. In February 2010, Diamond acquired Kettle Brand t

Chips, a premium potato chip

company, for $615 million cash from Lion Capital LLP, U.K. The acquisitions, largely financed by

long-term debt, have changed both the product as well as the risk profile of the company. 2

Diamond’s transition from walnuts into the snack business was evinced in the falling

percentage of walnuts sales as a percentage of total net sales. In fiscal 2006, 2007, 2008, and 2009,

the percentage of walnut sales was 67 percent, 59.8 percent, 60.2 percent, and 47 percent,

respectively. 3

The transition is also manifested in how the company described its business. In the

annual report for the fiscal year ending July 31, 2011 Diamond described its business as ‘‘an

innovative packaged food company focused on building and energizing brands including Kettle

Brand t

Chips, Emerald t

snack nuts, Pop Secret t

popcorn, and Diamond of California t

nuts’’

(Diamond Foods 2006–2012) The acquisitions helped Diamond achieve impressive sales growth

and profitability. The balance sheets, statements of operations, and statements of cash flows of

Diamond for each year since 2006 are presented in Exhibit 1, Panels A, B, and C, respectively.

The price of Diamond’s common stock reflected the Company’s superior financial performance

and its promising growth prospects. It went up from $17 (IPO price in July 2005) to $76.53 in July

2011, earning investors a compound annual return of 28 percent. Figure 1 depicts the history of

Diamond’s financial performance (net sales, gross profit, net income, and EPS) and the performance

of its stock vis-à-vis NASDAQ index.

The Mavericks behind Diamond’s Success: CEO Michael Mendes and CFO Steven Neil

Michael Mendes was the main force in converting Diamond from a cooperative into a

corporation and for making walnuts more mainstream as a healthy snack rather than just a baking

ingredient. He joined Diamond in 1991 as the Company’s vice president of international sales and

marketing. In 1997, at the age of 33, he was promoted to the position of president and CEO. He

1 Information in this section is obtained from various annual reports of the Company filed with the Securities and Exchange Commission.

2 In March 2010, Diamond Foods also raised approximately $180 million through the sale of 175 million shares of common stock.

3 The information regarding percentage of walnut sales was not disclosed in the annual reports for fiscal 2010 and 2011.

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EXHIBIT 1 Financial Statements

Panel A: Balance Sheet

Source: Diamond Foods, 10-K reports filed with the SEC. Note 1: Payable to growers was presented in Diamond’s balance sheet as a separate line item until July 31, 2010. In the balance sheet of July 31, 2011, however, the payable to growers of $15,186 was combined with accounts payable and accrued liabilities of $128,874, for a total of $144,060.

(continued on next page)

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served on Diamond’s board of directors beginning in 2005 and was the chairman of the board from

January 2011 to February 8, 2012.

Mendes worked hard to change Diamond into a more entrepreneurial and performance-driven

organization. ‘‘Through a combination of product innovation, savvy marketing, and acquisitions he

transformed Diamond from a sleepy cooperative for walnut growers into a $1 billion-a-year purveyor

of snacks’’ (Bloomberg Businessweek 2012). Every year since its incorporation in 2005, Diamond reported higher revenues, gross profit, and net income than the year before. The reported EPS

(earnings per share) exceeded the consensus estimate 4

of the analysts in most years. In a report filed

EXHIBIT 1 (continued)

Panel B: Statements of Operations

Source: Diamond Foods, 10-K reports filed with the SEC.

(continued on next page)

4 The consensus estimates of fully diluted EPS for fiscal years 2007, 2008, 2009, 2010, and 2011 were $0.508, $0.888, $1.36, $1.373, and $2.319, respectively (Bloomberg Businessweek 2012). In comparison, the actual fully diluted EPS numbers were $0.53, $0.91, $1.44, $1.36, and $2.22, respectively in 2007 through 2011 (Diamond Foods 2006–2011).

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EXHIBIT 1 (continued)

Panel C: Statements of Cash Flows

Source: Diamond Foods, 10-K reports filed with the SEC.

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FIGURE 1 Diamond Foods

(Source: Annual reports of Diamond Foods and Yahoo Finance)

Panel A: Sales, Gross Profit, Net Income, EPS (2005–2011) of Diamond Foods

Panel B: History of Stock Returns

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with the SEC in March 2010, Diamond touted its record of beating consensus analyst estimates for 12

consecutive quarters.

Michael Mendes appreciated the strong work ethic at Diamond and dedicated himself to his

job. His attention to detail provided Mendes with a deeper understanding of all aspects of the

Company’s operations. As one former employee said, ‘‘You could talk to Michael about anything

from nut sourcing to the prices being paid by Diamond’s international and retailer customers.

Mendes’ knowledge of what was happening at Diamond was the best of anyone in the Company’’

(Diamond Foods, Inc. 2012, 10).

Steven Neil, who had served as an independent director on Diamond’s board since 2005,

became Diamond’s executive vice president, and chief financial and administrative officer in March

2008 and served in that position until February 2012. Neil was reportedly the type of CFO who

maintained personal oversight of the general operations of the business and looked after several

functions including logistics, IT, treasury, grower relations, and purchasing. Neil visited walnut

growers in the field at least twice a year, usually once during harvest and once during some stage of

the bloom, either at the beginning of or during the middle of the summer (Diamond Foods, Inc.

2012, 174).

Compensation of Diamond’s Senior Management

Mendes and Neil were handsomely rewarded for their contributions to Diamond’s success.

Mendes’ compensation in fiscal 2004 was $1.1 million. Five years later, in 2009, it had more than

tripled to $3.8 million and for the fiscal year 2011, it almost doubled to approximately $7.3 million

(Diamond Foods 2006–2012). The compensation paid to Neil, who became CFO in March 2008,

was approximately eight times that of his predecessor CFO at the time of Diamond’s conversion

from a cooperative.

Consistent with the goal of becoming a performance-driven organization, the compensation of

Diamond’s senior management was tied to the Company’s success. Diamond’s annual bonus

incentives ‘‘were determined by both a corporate financial objective, representing 60 percent of

bonus potential, and individual objectives for each named executive officer, representing 40 percent

of bonus potential’’ (Diamond Foods, Inc. 2012, 179). In 2010 and 2011 Mendes received bonuses

of approximately $1.4 million and incentive compensation of more than $2.6 million, while Neil

received bonuses totaling more than $875,000 and incentive compensation worth more than $1.1

million (Henning 2012). 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

(Huffington Post 2012).

Plans for a More Prosperous Future: Diamond’s Attempts to Acquire Pringlest

On the heels of the past fruitful acquisitions and successful integration of Kettle Brand t

Chips

in Diamond’s operations, the Company embarked upon an even more ambitious target, Pringles t .

Beginning in May 2010, Diamond submitted several purchase offers to Proctor & Gamble (P&G) to

purchase Pringles t . The Pringles

t acquisition would make Diamond the second-largest snack food

company, only behind PepsiCo’s Frito-Lay t .

Although Proctor & Gamble initially rejected Diamond’s offers, negotiations resumed in

February 2011. On April 5, 2011, Diamond reached an agreement to acquire Pringles t

by

exchanging $1.5 billion of Diamond’s stock and paying $850 million in cash toward the total

purchase price of $2.35 billion. The transaction had a ‘‘cash collar,’’ such that if the price of

Diamond’s stock dropped, Diamond would increase the cash component to as high as $1.05 billion,

and if the stock price rose, the cash component would be reduced to as low as $700 million. In the

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press release announcing the signing of a definitive agreement for the proposed merger, Diamond

provided the following rationale for acquiring Pringles t :

The largest potato crisp brand in the world with sales in over 140 countries and

manufacturing operations in the U.S., Europe, and Asia, Pringles t

had a combination of

proprietary products, unique package design and significant advertising investment. The

acquisition of Pringles t

would enable Diamond to gain greater merchandising and

distribution influence, leverage its sales and distribution infrastructure, and obtain a

broader global manufacturing and supply chain platform with access into key growth

markets including Asia, Latin America, and Central Europe. (PR Newswire 2011)

The expected benefits of the merger appeared enticing. In the conference call to announce

Pringles t

merger, Mendes stated, ‘‘In fiscal 2012 we expect net sales for the combined company to be approximately $1.8 billion and EPS in the range of $3.00 to $3.10. This reflects EPS accretion of

$0.12 to $0.15 per share’’ (Thompson Reuters Streetevents 2011). In the same conference call, CFO Steven Neil mentioned that although Diamond would incur merger and integration related costs of

approximately $100 million 5

over the first two years, ‘‘the financial benefits of improved margins, significant EPS accretion, and free cash flow will make Diamond an even stronger company in the

future, delivering exceptional value to Diamond and P&G shareholders’’ (Thompson Reuters Streetevents 2011). News of the Pringles

t acquisition and prospects of resulting improvement in

financial performance took Diamond’s share price to an all-time high of $96.13 in September 2011.

The Specter of Accounting Controversy Appears on Diamond’s Horizon

Everything seemed to be going perfectly well for Diamond until the publication of a report on

September 25, 2011 by Mark Roberts, an analyst with the Off Wall Street Consulting Group (Off

Wall Street 2011). Roberts noted that earnings for 2011 were likely overstated because the

Company made payments this year to pay off growers who were underpaid last year.

Roberts’ report on Diamond’s accounting sparked interest in the media. On September 26,

2011, an article in Reuters Breakingviews discussed the issue of payments to walnut growers

stating that ‘‘Diamond’s long-term contracts gave it great leeway to determine a final price at the end of the crop year. And while walnut prices have been rising thanks to Chinese demand, they are

among the most opaque in the agricultural world and can vary widely’’ (Reuters Breakingviews 2011). Quoting the growers contacted by Breakingviews, Reuters stated that ‘‘Based on a closing payment on August 31 for the previous year’s crop, [Diamond] undercut competitors by at least a

third, a far bigger discount than is typical’’ (Reuters Breakingviews 2011). 6

On September 27,

2011, Wall Street Journal quoted that ‘‘Pressure from growers could quickly become an issue for Diamond. After all, growers can go elsewhere when contracts expire’’ (Wall Street Journal 2011).

Walnut Costs and Long-Term Grower Contracts

Walnut growers have long-term walnut purchase agreements with Diamond. Farmers deliver

their crop during the Fall harvest season (September-October-November) and the Company pays

the farmers in installments as per the guidelines issued at the beginning of the season. Typically, the

payments are made in three installments: the delivery payment (10–14 days after delivery); the

5 On September 16, 2011, Diamond announced in its proxy statement an increase of $50 million in the estimated transaction and integration costs of the Pringlest acquisition, raising the figure from $100 million to $150 million (Diamond Foods 2006–2011).

6 The article also reported that ‘‘Based on Diamond’s estimated market share, this makes the company’s costs around $60 million lower than they would be had Diamond paid something closer to rivals’’ (Reuters Breakingviews 2011).

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progress payment (February 15); and the final payment (August 15 of the following year). The

Company’s fiscal year ends July 31.

The final price for the walnuts delivered was not known at the time of delivery. Growers

accepted the price uncertainty in return for Diamond’s willingness to buy their entire crop,

recognition of their longstanding relationship with the Company, and the past experience of

Diamond’s paying a fair price for walnuts, especially in lean years. For example, in 2008, walnut

prices declined to about 60 cents a pound, but Diamond paid its growers more than 70 cents

(Barron’s 2011). The policy for Diamond’s accounting for inventories from its annual report for the fiscal year

ending July 31, 2011 (filed with the Securities and Exchange Commission [SEC] on September 15,

2011) stated:

All inventories are accounted for on a lower of cost (first-in, first-out) or market basis.

We have entered into long-term Walnut Purchase Agreements with growers, under which

they deliver their entire walnut crop to us during the Fall harvest season and we determine

the minimum price for this inventory by March 31, or later, of the following calendar year.

The final price is determined no later than the end of the Company’s fiscal year. This

purchase price will be a price determined by us in good faith, taking into account market

conditions, crop size, quality, and nut varieties, among other relevant factors. Since the

ultimate price to be paid will be determined subsequent to receiving the walnut crop, we

must make an estimate of price for interim financial statements. Those estimates may

subsequently change and the effect of the change could be significant. (Diamond Foods

2006–2012)

The ‘‘Unusual’’ Recording of the Payments for the Fall 2009 and Fall 2010 Crops

While the delivery and progress payments for the Fall 2009 crop were made in a customary

fashion, the third and final payment in August 2010 was unusual. Diamond sent a letter to growers,

signed by CEO Mendes, stating that the August 2010 check was intended to ‘‘represent both the final payment of the Fall 2009 crop and a continuity payment reflecting the value of the multi-year supply

arrangement’’ (Diamond Foods, Inc. 2012, 182). The term ‘‘continuity payment’’ was not used before by Diamond, and not mentioned to growers in the annual guidelines for the Fall 2009 crop.

7

The payment pattern for the Fall 2010 crop was similar to that for the Fall 2009 crop, except

that the phrase ‘‘momentum payment’’ was substituted for the phrase ‘‘continuity payment.’’ Diamond sent out two checks to each grower toward the final payment, one dated August 31, 2011

and the other dated two days later, September 2, 2011. Neither of these payments used the word

‘‘final payment’’ as Diamond did in the past. In the letter accompanying the September 2011 check, the Company stated that the momentum payment ‘‘is designed to reflect the projected market environment prior to your delivery of the 2011 crop . . . This payment conveys the anticipated value added by our branded walnut retail business during the transitional period prior to delivery and new

crop availability. The momentum payment is independent of and incremental to your upcoming

delivery payment’’ (Diamond Foods, Inc. 2012, 23). There were different views on whether the ‘‘continuity’’ and ‘‘momentum’’ payments made by

Diamond to the walnut growers should be recorded as purchases of the preceding or current fiscal year.

The Company treated them as purchases (and therefore, cost of sales) of the current year. For instance,

with regard to the August/September 2011 payment, Diamond issued a press release on October 3, 2011

7 Even with the continuity payment, Diamond paid less than the market price to farmers for the Fall 2009 crop.

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stating that it had made a ‘‘pre-harvest momentum payment to walnut growers in early September, prior

to the delivery of the Fall walnut crop to reflect the fiscal 2012 projected market environment and the

payment was accounted for in the fiscal year 2012 cost of goods sold’’ (Diamond Foods 2006–2012).

However, several walnut suppliers to Diamond maintained that the payment was for the crop of

the earlier year and hence should have been recorded as purchases (and hence, cost of sales) of the

prior year. Some of the ‘‘momentum’’ payments were puzzling because they were made to farmers

who terminated their relationship with Diamond in the spring following the 2010 crop season. A

supplier of walnuts to Diamond mentioned that she ‘‘knew at least two growers who had already

cancelled their contracts to sell walnuts to Diamond in Fall 2011, but still received the momentum

payment’’ (Diamond Foods, Inc. 2012, 26 ). Yet, Diamond’s management denied that these

payments were compensation for last year’s crop. Instead, they indicated that the payments were

made ‘‘in an effort to optimize cash flow for growers’’ (NYTimes.com 2011).

Diamond’s independent auditors—Deloitte—did not raise any red flags for Diamond’s

accounting treatment of ‘‘continuity’’ or ‘‘momentum’’ payments. They provided an unqualified

audit opinion on Diamond’s financial statements for fiscal years 2010 and 2011. Deloitte’s audit

opinions stated that Diamond complied with GAAP and maintained effective internal control over

its financial reporting.

Audit Committee Investigation, SEC Investigation, and Class-Action Suit

The September 25, 2011 report by Mark Roberts on Diamond’s questionable accounting and

the subsequent media attention it sparked resulted in an audit committee investigation, an SEC

investigation, and a class-action suit. In Fall 2011, Diamond’s audit committee initiated an internal

probe to investigate whether Diamond’s senior management intentionally adjusted the accounting

for the grower payments to increase profits for a given period. In December 2011, the SEC began a

formal investigation of Diamond’s recording of costs, payables to growers, and payments to them.

This was followed by a class-action suit demanding a jury trial against Diamond, its senior

management, and Deloitte—its auditors.

The plaintiffs in the class-action suit alleged that Diamond and its senior managers were

motivated to inflate share price of Diamond during a period in which Diamond was seeking to use

its stock to acquire Pringles t

(Diamond Foods, Inc. 2012, 131). A financial accountant employed at

Diamond from April 2008 to May 2011 testified that he was asked by Diamond’s management to

change commodity costs ‘‘without any business justification for doing so’’ and was asked to prepare

financial reports to determine earnings ‘‘if we dropped commodity prices half a penny or one

penny’’ (Diamond Foods, Inc. 2012). If the executives approved, the change would be accepted and

recorded in a journal entry. Reportedly, at the conclusion of each month, the Company prepared an

Excel spreadsheet detailing the monthly financial statements. Then senior director Debra Donaghy,

controller Jim Tropp, and CFO Neil reviewed those results and ‘‘scrubbed’’ them (Diamond Foods,

Inc. 2012). According to one witness, it ‘‘seemed like every quarter they dropped commodity costs,

to get to EPS goals’’ (Diamond Foods, Inc. 2012). Because Diamond was buying a hundred million

pounds or more of walnuts, a small drop in the walnut cost per pound helped it to achieve a

significant change in earnings.

Prices that Diamond paid to the walnut growers were not disclosed publicly or internally. A

witness said that accounting for grower payments was maintained within a very small circle of people

including controller Jim Tropp, CFO Neil, CEO Mendes, and senior vice president of grower

accounting, Eric Heidman, Mendes’ brother-in-law (Diamond Foods, Inc. 2012, 13). An employee

who managed every price list for every product of Diamond said that he ‘‘knew pricing for everything

but in-shell nut price’’ and that senior management refused to give him that information when asked

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(Diamond Foods, Inc. 2012, 13). Another witness recalled situations where accounting decisions were

discussed in the context of the impact the decision would have on the Diamond share price.

A witness who was an assistant treasurer from 1999 through May 2011 testified that Neil and

other executives decided ‘‘on numerous occasions’’ to accelerate payments or delay recognizing an

expense in order to make their earnings look better. ‘‘If we were making too much money they

would push more costs in. Whenever we couldn’t hit our numbers, [or] if they needed extra money,

it was always commodity costs that got changed’’ (Diamond Foods, Inc. 2012, 18).

Despite the allegations above, Diamond’s management insisted that its accounting for grower

payments was fine. In October 2011, an analyst at RBC Capital Markets, who spoke with

Diamond’s executives, wrote, ‘‘Management insists that this ‘momentum’ payment is viewed and

treated internally as a payment related to this year’s crop, not last year’s, and that attestations to the

contrary are simply misinformed’’ (NYTimes.com 2011).

EPILOGUE

On November 2, 2011, Dayton Business Journal published an article stating that P&G delayed the sale of Pringles

t to Diamond Foods until the end of June 2012 because of Diamond’s internal

accounting investigation (Dayton Business Journal 2011). Diamond’s shares, which were trading at more than $90 in September 2011, were trading below $28 by December 2011.

On February 8, 2012, Diamond disclosed the following in its 8-K filing (Report of

Unscheduled Material Events or Corporate Event) to the SEC:

The Audit Committee has substantially completed its investigation of the Company’s

accounting for certain crop payments to walnut growers. The Committee has identified

material weaknesses in the Company’s internal control over financial reporting and

concluded that a ‘‘continuity’’ payment made to growers in August 2010 of approximately $20 million and a ‘‘momentum’’ payment made to growers in September 2011 of

approximately $60 million were not accounted for in the correct periods. The Audit

Committee concluded that the Company’s financial statements for the fiscal years 2010

and 2011 will need to be restated. (Diamond Foods 2006–2012)

Diamond placed Michael Mendes and Steven Neil on administrative leave effective February 8,

2012 for their alleged involvement in the accounting scandal. Subsequently, they both resigned from

their positions in November 2012. In a separate agreement, Mendes agreed to pay the Company a

$2.74 million cash clawback, representing the total value of his 2010 and 2011 bonuses, and return

6,665 shares of Diamond stock awarded to him after fiscal 2010 (San Francisco Business Times 2012). On February 15, 2012, Diamond Foods and P&G mutually terminated the deal to acquire

Pringles t. Diamond did not have to pay any break-up fees to P&G. Pringlest was acquired by

Kellogg Company for $2.7 billion cash.

In its annual report for fiscal year 2012, filed with the SEC on December 7, 2012, Diamond

reported sales of $981 million, a 1.55 percent increase over the 2011 sales of $966 million. The

Company stated that its gross margin percentage (18.3 percent in 2012 compared to 22.4 percent in

the prior year) contracted primarily due to the decline in walnut volume, increase in walnut

commodity costs, and heavy promotional spending on snack brands. Diamond reported a negative

EPS of $3.98 and suspended dividend payments.

On August 21, 2013, Diamond agreed pay about $100 million to settle the shareholder lawsuit.

The Company said that it would pay $11 million in cash and issue 4.45 million common shares to a

fund to settle the lawsuit relating to the accounting scandal (Reuters 2013).

On January 9, 2014, the SEC reached a settlement with the Company in which Diamond

agreed to pay $5 million (SEC v. Diamond Foods, Inc. 2014). Accounting Today (2014) stated, ‘‘By

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disguising the fact that the payments were related to prior crop deliveries, Diamond was able to

manipulate walnut costs in its accounting to hit quarterly targets for earnings per share and exceed

analyst estimates.’’ The SEC also reached a settlement with Michael Mendes who agreed to pay a $125,000 penalty to settle the charges without admitting or denying the allegations (SEC v. Michael Mendes 2014). The SEC’s litigation is continuing against Steven Neil (SEC v. Steven Neil 2014).

REQUIREMENTS8

Requirement 1

Does Diamond’s recording of the August 2010 ‘‘continuity’’ payments and August/September 2011 ‘‘momentum’’ payments as the purchases of fiscal 2010 and fiscal 2011, respectively, comply with the U.S. GAAP (Generally Accepted Accounting Principles)? Why or why not? Provide support

from the accounting literature, including the FASB Concept Statements, in support of your argument.

Requirement 2

Diamond’s audit committee concluded that a ‘‘continuity’’ payment made to growers in August 2010 of approximately $20 million and a ‘‘momentum’’ payment made to growers in August/ September 2011 of approximately $60 million were not accounted for in the correct periods. Calculate

the effect of Diamond’s incorrect recording of the August 2010 and August/September 2011

payments on the pretax income for the years ending July 31, 2010 and July 31, 2011, respectively.

Explain and provide supporting calculations, if any. For this requirement, assume that Diamond sold

all the walnuts purchased during a fiscal year in that year itself (i.e., there is no inventory brought

forward from the previous fiscal year or carried forward to the subsequent fiscal year).

Requirement 3

(a) What were plausible motivations for Diamond’s management to misstate financial results

for fiscal 2010 and 2011?

(b) What would the management of a company such as Diamond, that was reportedly growing

fast in sales and profits each year, need to do in subsequent years if it wants to manage

income the same way as it did in fiscal 2010 and 2011? Would it be possible?

Requirement 4

(This requirement and the data therein are independent of other case requirements.)

(a) Assume that a walnut farmer agrees to supply 100,000 pounds of walnuts to Diamond

Foods during the Fall 2009 crop season. The walnuts are delivered on September 15, 2009

when the estimated price is $0.80/pound. Diamond agrees to make payments according to

the following schedule:

Date Payment

October 12, 2009 35 percent of the estimated price. Estimated price is $0.80/pound.

February 15, 2010 85 percent of the total payment based on the latest estimated price will be paid by this

date. Estimated price on this date is $0.90/pound.

August 15, 2010 The remaining payment is made.

8 An Excel file containing the data in the Case Exhibits is available as a downloadable file, see Appendix A.

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On April 15, 2010, Diamond announces to all the walnut suppliers that the final price for

the Fall 2009 crop will be $1.00/pound. On May 15, 2010, Diamond sells 88 percent of the

walnuts purchased from the farmer for cash at the rate of $1.20/pound. The remaining 12

percent of the walnuts is carried in inventory to the following fiscal year.

Prepare the necessary journal entries in the books of Diamond Foods on (1) September 15,

2009, (2) October 15, 2009, (3) February 15, 2010, (4) April 15, 2010, (5) May 15, 2010,

and (6) August 15, 2010. Also, present the necessary adjusting entries, if any, at the end of

Diamond’s fiscal year on July 31, 2010. Closing entries need not be presented. Assume that

Diamond follows a periodic inventory system.

(b) Assume that Diamond would like to manage income by manipulating the recorded cost of

walnuts acquired from the farmer. It chooses to record the payment of August 15, 2010 as

purchases of the following fiscal year ending July 31, 2011. How would the journal entries

in Requirement 4 (a), including adjusting entries, if any, on July 31, 2010 be different?

(c) What would be the effect on the financial statement items in the table below of the incorrect

recording of the August 15, 2010 payment as purchases of the following year (ending July

31, 2011)? Assume that Diamond follows the periodic inventory system. Indicate the

direction (O/S ¼ Overstatement, U/S ¼ Understatement, NE ¼ No effect) as well as the amounts.

(d) If the error in recording the August 15, 2010 payment is discovered on September 15, 2011

(before the books are closed for the fiscal year ending July 31, 2011), what would be the journal entry necessary to correct the error? Ignore the tax effects.

(e) Continue with 4(d) above. Assume that the tax rate is 35 percent and that Diamond follows

the accrual method for tax reporting. What would be the journal entry to record the income

tax effects of the misstatement?

(f ) If the error in recording the August 15, 2010 payment is discovered on September 25, 2011

(after the books are closed for the fiscal year ending July 31, 2011), what journal entry, if any, would be necessary to correct the error? Ignore the income tax effects.

(g) Continue with 4(f ) above. Assume that the tax rate is 35 percent and that Diamond Foods

follows the accrual method for tax reporting. What journal entry, if any, would be

necessary to record the income tax effects of the misstatement?

Requirement 5

(a) The audit committee of Diamond reported that payments to walnut growers of about $20

million in August 2010 and about $60 million in August/September 2011 were not booked

in the correct periods. Present the effect of correcting the grower accounting errors on the

comparative balance sheets and comparative statements of operations of Diamond. Provide

Diamond Foods, Inc.: Anatomy and Motivations of Earnings Manipulation 59

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your answers in the formats provided at the end of the case in Exhibit 2, Panel A—Balance

Sheets, and Exhibit 2, Panel B—Statements of Operations. An Excel file containing the

Case data is available from your instructor.

Assume that the weighted average number of common shares outstanding is approxi-

mately 22 million and 18.7 million for the years ending July 31, 2011 and July 31, 2010,

respectively. For the changes resulting from this error, please assume the following:

(i ) Income tax rate ¼33 percent. Diamond follows the accrual method of accounting for financial reporting, as well as income tax purposes.

EXHIBIT 2 Format for Requirement 5

Panel A: Balance Sheets

(continued on next page)

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Issues in Accounting Education Volume 30, No. 1, 2015

(ii ) Approximately 88 percent of the inventory purchased by Diamond is sold in the year of

purchase, the remaining 12 percent being carried in inventory to the following fiscal year.

(b) Continue with Requirement 5(a) above. Assume that the accounting errors are discovered

on September 15, 2011, before Diamond’s books for fiscal 2011 are closed for SEC filing

purposes. Present a journal entry to record the error correction.

(c) Continue with Requirement 5(a) above. Assume that the accounting errors are discovered

on September 25, 2011, after Diamond’s books for fiscal 2011 are closed. Present a journal

entry to record the error correction.

(d) An article in the Wall Street Journal of September 27, 2011 stated, ‘‘Anytime companies

make extraordinary payments to suppliers, there is an increased likelihood of financial

shenanigans being used to shift expenses and cash flows between periods to manipulate the

appearance of the company’s financial statements’’ (Wall Street Journal 2011). Do you

EXHIBIT 2 (continued)

Panel B: Statements of Operations

Diamond Foods, Inc.: Anatomy and Motivations of Earnings Manipulation 61

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believe that Diamond shifted its cash flows between periods? Explain in the context of the

effect on Diamond’s statement of cash flows for the fiscal years ending July 31, 2010 and

2011.

Requirement 6

What is a clawback provision? In the presence of the clawback provision, what might have

been the incentives for the senior management of Diamond to manipulate the Company’s earnings?

Requirement 7

Companies influence reported earnings via accruals earnings management, or real earnings

management. In accruals earnings management, managers influence earnings through discretionary

accrual choices either within or outside of GAAP (accelerated revenue recognition, for instance). In

real earnings management, managers influence earnings through choices about real business

activities that impact cash flows (reducing discretionary spending such as research and

development, for example). Which of these techniques of earnings management do you think

were used by the senior management of Diamond Foods during fiscal years 2010 and 2011? Note

that this is not an either/or question. If you determine that there are instances of both types of

earnings management, list specific examples of both. What are the implications of earnings

management for Diamond Foods and its stakeholders?

REFERENCES

Accounting Today. 2014. Diamond Foods to Pay $5 Million to Settle SEC Accounting Charges. Available

at: http://www.accountingtoday.com/news/Diamond-Foods-Pay-Settle-SEC-Accounting-Charges-

69234-1.html

Barron’s. 2011. Getting to the Nut of the Problem. Available at: http://online.barrons.com/articles/ SB50001424052748704270204577013933878950486

Bloomberg Businessweek. 2012. Has Diamond Foods Lost Its Luster? Available at: http://www.

businessweek.com/magazine/has-diamond-foods-lost-its-luster-01122012.html

Dayton Business Journal. 2011. P&G Delays $1.5B Sale of Pringles to Diamond Foods. Available at:

http://www.bizjournals.com/dayton/news/2011/11/02/pg-delays-15b-sale-of-pringles-to.html

Diamond Foods, Inc. 2012. Securities Litigation. Case No. 11-cv-05386-WHA. Available at: http://

securities.stanford.edu/filings-documents/1048/DMND00_01/2012730_r01c_11CV05386.pdf

Diamond Foods. 2006–2012. Annual Reports, Press Releases, and Proxy Statements. Available at: http://

investor.diamondfoods.com/phoenix.zhtml?c¼189398&p¼irol-sec Henning, P. J. 2012. Next Steps in Diamond Food Accounting Inquiry. Available at: http://dealbook.

nytimes.com/2012/02/13/next-steps-in-diamond-foods-accounting-inquiry/

Huffington Post. 2012. Diamond Foods Accounting Scandal Seeds Sown Years Ago. Available at: http://

www.huffingtonpost.com/2012/03/19/diamond-foods-accounting-scandal_n_1361234.html

NYTimes.com. 2011. At Diamond Foods, Accounting Weighs on Pringles Deal. Available at: http:// dealbook.nytimes.com/2011/11/29/accounting-at-diamond-foods-weighs-on-pringles-deal/

Off Wall Street. 2011. Report on Diamond Foods. Available at: http://www.offwallstreet.com/reports/

NEW_DMND_9-25-11.pdf

PR Newswire. 2011. Diamond Foods to Merge P&G’s Pringles Business into the Company. Available at: http://www.prnewswire.com/news-releases/diamond-foods-to-merge-pgs-pringles-business-into-the-

company-119239344.html

Reuters. 2012. Diamond Foods Accounting Scandal Seeds Sown Years Ago. Available at: http://www.

reuters.com/article/2012/03/19/us-diamond-tax-idUSBRE82I0AQ20120319

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Issues in Accounting Education Volume 30, No. 1, 2015

Reuters. 2013. Diamond Foods to Settle Investor Lawsuit for About $100 Million. Available at: http://www. reuters.com/article/2013/08/21/us-diamondfoods-lawsuit-idUSBRE97K0XN20130821

Reuters Breakingviews. 2011. Mixed Nuts. Available at: http://www.breakingviews.com/pg_percentE2_ percent80_percent99s-pringles-partner-warrants-careful-taste-test/1608445.article

San Francisco Business Times. 2012. Diamond Foods ex-CEO resigns and will pay $2.7 m clawback. (November 21).

SEC v. Diamond Foods, Inc. 2014. Case 3:14–cv-00123. January 9. Available at: http://www.sec.gov/ litigation/complaints/2014/comp-pr2014-4-diamond.pdf

SEC v. Michael Mendes. 2014. Accounting and Auditing Enforcement Release No. 3526. January 9. Available at: http://www.sec.gov/litigation/admin/2014/33-9508.pdf

SEC v. Steven Neil. 2014. Case 3:14–cv-00122. January 9. Available at: http://www.sec.gov/litigation/ complaints/2014/comp-pr2014-4-neil.pdf

Thomson Reuters Streetevents. 2011. DMND: Diamond Foods and P&G Conference Call to Announce Pringles Merger into Diamond Foods, Inc. Available at: https://www.pg.com/en_US/downloads/ investors/PG-Diamond_Conference_Call_Transcript.pdf

Wall Street Journal. 2011. Hidden Flaw in P&G’s Diamond Deal. Available at: http://online.wsj.com/ articles/SB10001424052970204831304576595000985103090

APPENDIX A

Diamond_Foods_Case_Exhibits: http://dx.doi.org/10.2308/iace-50948.s01

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CASE LEARNING OBJECTIVES AND IMPLEMENTATION GUIDANCE

Overview of the Case and Learning Objectives

Diamond Foods, Inc. is a real-world case addressing financial reporting issues relating to the

attempt by the Company’s management to falsify earnings by shifting commodity costs.

Diamond, which was converted from a California agricultural cooperative to a Delaware

corporation in 2005, grew consistently in revenues and profits until 2010. As walnut prices

sharply increased in 2010 and 2011, Diamond needed to pay more to its growers but intended to

avoid the adverse effect of the payments on its reported income. Beating the analyst estimates of

earnings and keeping up the stock price was important for Diamond because it was negotiating

with Proctor & Gamble to acquire Pringles t

with the exchange of $1.5 billion of Diamond’s stock

and $850 million cash.

Diamond’s management devised a scheme by which the company made special payments

(labeled as ‘‘continuity’’ and ‘‘momentum’’ payments) to walnut growers but recorded them as purchases of the following fiscal year instead. By delaying the recognition of the cost of walnuts

acquired into later accounting periods, Diamond Foods materially overstated earnings in fiscal years

2010 and 2011.

Diamond’s stock price had increased from $17 in 2005 to $96 in 2011. However, the upward

movement in the stock price came to a halt in September 2011 with the news questioning

Diamond’s recording of costs, inventories, profits, and payables to walnut suppliers. The news story

was followed by an internal investigation by Diamond’s audit committee, a SEC investigation, and

a class-action suit, which resulted in driving Diamond’s stock price down to $14 in November

2012.

The primary learning objective of the case is to help students understand the anatomy and

motivations of earnings manipulation. Specifically, students have an opportunity to:

1. Apply the FASB’s Conceptual Framework to address fundamental principles of accounting

in a real-world context.

2. Determine the nature of errors (counterbalancing or non-counterbalancing) and compute

their numerical effects (including related tax effects) on financial statements.

3. Understand motivations for earnings management, and actions needed for managing

earnings of future years.

4. Explain the anatomy of a financial reporting fraud by reconstructing journal entries that

would likely have been recorded by fraud perpetrators.

5. Prepare comparative financial statements for retrospective restatements in a real-world

setting.

6. Explain rationale for use of the clawback provision in compensation contracts and

understand why the clawback provision might not produce intended results in certain

situations.

7. Understand the difference between real and accrual-based earnings management, and the

effect of each on an organization and its stakeholders.

In the process of completing the case assignment, students are also able to (1) gain a clearer

understanding of the periodic versus perpetual inventory systems and of the effect of closing

entries, (2) recognize that accrual-based earning management has no direct impact on cash flows,

(3) understand that an important item, such as cost of sales in the income statement, can be an

estimated number, and (4) identify, interpret, and apply the U.S. authoritative accounting literature

using the FASB Codification in a real-world setting.

The case context is interesting to students because Diamond Foods is a real company and

many students are familiar with its brands such as Diamond t

walnuts, Pop Secret t

popcorn, and

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Issues in Accounting Education Volume 30, No. 1, 2015

Kettle Brand t

potato chips. 9

An appealing feature of the case is that it involves application of

fundamental principles of accounting rather than complex provisions of a professional

pronouncement. Diamond Foods is one of the few cases in financial statement fraud that enables

students to understand—at the granular level of journal entries—the way the fraud was

perpetrated. Also, students are exposed to a somewhat unique motivation for earnings

management—enhancing the price of the stock to be used as a currency in the M&A context—

a motivation that students are not exposed to in textbooks or in the extant literature of instructional

resources.

The case requirements intend to develop professional skills consistent with the Core

Competency Framework of the AICPA (2003). More recently, the Pathways Commission (2012)

reviewed information from multiple sources, including the IFAC, the NASBA, the AICPA, the

IMA, and the IIA and developed recommendations for the components of accounting competency.

The Diamond Foods case serves as a platform to enhance those competencies (technical knowledge,

professional skills and professional integrity, responsibility, and commitment) as well.

Implementation Guidance

The case is appropriate for use in courses such as intermediate accounting, accounting theory,

and professional accounting research. If the case is used in the first course of intermediate

accounting, Requirement 5 (financial reporting of accounting restatements) should not be assigned.

If it is used in the second course of intermediate accounting, or in the accounting theory or

professional accounting research course, all requirements can be assigned. In such courses, it is

advisable that the chapters on accounting changes and accounting for income taxes are addressed

before the case assignment is due.

The case is most effective as a collaborative project where students can form groups of two

or three, divide the work, gain exposure to multiple viewpoints, and submit their written

analysis. Subsequently, the case should be discussed in class 10

to highlight salient points and to

indicate avenues for additional analysis. A lead time of at least three weeks is suggested before

the case write-ups are required. About 60 minutes should be allowed for class discussion of the

case.

In grading the case write-ups, instructors should look for evidence of (1) identification of

relevant issues, (2) computational accuracy of numbers derived, explicit statement of assumptions

made and appropriateness of rationale provided, (3) quality and depth of research and appropriate

paraphrasing and citations, and (4) quality of writing (grammar, spelling, punctuation, sentence

structure, etc.).

Alternatively, the case can be used as an ongoing exercise to demonstrate to students a

connection to the real world of the topics in the intermediate accounting course sequence. In such a

case, the case can be distributed at the beginning of the first intermediate course and the assignment

questions can be raised throughout the two-course sequence whenever a specific topic is discussed.

This approach has an advantage that it does not require one big chunk of class time and students are

reminded repeatedly of the relevance of course topics to the real-world issues. 11

A table of

9 Instructors can also share a three-minute YouTube video on Diamond’s investigation as a way to introduce the case to the class. The video is available at: http://www.youtube.com/watch?v¼qFbQPxOpBGE

10 A file containing PowerPoint slides on salient case issues and exhibits is available as a downloadable file in Appendix C in the Teaching Notes.

11 A challenge is to remember to bring up the issues, getting student involvement (especially when technical work such as preparation of retroactive restatement of financial statements is required) and making sure that students are able to make a connection between the case issues discussed in different class sessions over the semester.

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correspondence between topics addressed by the intermediate course sequence and issues raised by

the Diamond Foods case appears below. 12

Financial Reporting Topic Related Case Requirements

Conceptual Framework Researching FASB Codification Requirement 1

Earnings management Requirement 3

Requirement 7

Accounting cycle and the effect of transactions on financial

statements

Requirement 2

Requirement 4 (a), 4 (b)

Effect of inventory errors and correcting entries (Intermediate I) Requirement 4 (c), 4 (d), 4 (e), 4 (f )

Accounting changes (retroactive restatement of financial statements) Requirement 5 (a)

Nature of errors and error correction, including tax effects

(Intermediate II)

Requirement 5 (b) and 5 (c)

Statements of cash flows (Intermediate II) Requirement 5 (d)

Ethics and professional responsibility, management compensation Requirement 6 and a recap of

different issues in the case

Faculty and Student Feedback

The case was administered in five sections of an Intermediate Accounting I course at the

undergraduate level (99 students taught by two instructors), six sections of an Intermediate

Accounting II course at the undergraduate level (107 students taught by three instructors), and two

sections of an Intermediate Accounting II course at the graduate level (60 students taught by one

instructor). 13

In each section, the case was assigned as a collaborative project. The suggested length

of the write-up was 10 to 12 pages (excluding tables and exhibits) and the project carried 15 percent

of the course grade.

Each instructor expressed great satisfaction with the case, the issues it raised, and the

usefulness of the case to achieve the learning objectives. Each instructor commented favorably on

readability of the case and logical organization of the case requirements. In the student evaluation of

teaching, several instructors received positive comments from students regarding the case

assignment.

The student feedback was positive, as can be seen in Table 1. For the primary learning

objective of the case assignment (understand the anatomy and motivations of earnings

manipulation), the average score on a scale of 1 (strongly disagree) to 5 (strongly agree) was

4.25. 14

Similarly, the average score for another important learning objective (understanding the

effect of errors on financial statements) was 4.26. The case assignment was perceived to promote

critical thinking and problem solving skills (average score of 4.52). On most dimensions, perception

of the graduate students was more positive than the undergraduate students. Graduate students also

spent more time for the case assignment (about 15 hours) compared to the undergraduate students

(about 10 hours).

12 Some issues in the case relate to multiple topics in a financial reporting; as such, the correspondence of case issues and course topics indicated in the table is not one-to-one.

13 In a later semester, the case was also used by an instructor in a professional accounting research course for class discussion. No formal student feedback was collected, but the instructor found the case very useful to demonstrate motivations and mechanisms of earnings management.

14 These are the weighted average numbers for all 13 sections.

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TABLE 1

Summary of Student Feedbacka

Undergraduate Graduate

Intermediate Accounting I

Intermediate Accounting II

Intermediate Accounting II

Number of sections 5 6 2

Number of instructors. 2 3 1

Number of students. 99 107 60

Overall usefulness of the case. 4.07 3.74 4.47

The case helped me learn that the Conceptual Framework is

helpful in addressing some fundamental principles of

accounting (e.g., expense recognition).

4.17 4.10 4.48

The case helped me understand the anatomy of a financial

reporting fraud, including the journal entries that must

have been made by the company to manipulate earnings.

4.19 4.00 4.55

The case helped me understand that an important item, such

as cost of goods sold, can be an estimated number in the

financial statements.

4.92 4.08 4.42

The case improved my understanding of the effect of errors

on financial statements.

4.34 4.00 4.43

The case helped me understand that earnings management

typically has no effect on cash flows of a company,

although the presentation of the operating cash flows

under the indirect method might change somewhat.

3.61 3.51 4.02

The case assignment strengthened my understanding of

managers’ motivations for managing earnings.

4.20 4.12 4.52

My understanding of the clawback provision, and why it

might not produce intended effects in certain situations,

was enriched by the case assignment.

4.15 4.03 4.38

The case helped me understand the difference between real

versus accrual-based earnings management.

3.94 3.83 4.22

I would recommend that the case be used as a part of this

course in the future.

4.00 3.46 4.43

The case assignment required critical thinking and problem-

solving skills.

4.55 4.33 4.69

The case improved my understanding of: 4.33

Recording journal entries for error correction when the

books are closed. Not Asked 3.94 4.33

Recording journal entries for error correction when the

books are not closed. 3.92 4.33

Presenting comparative financial statements for

retrospective restatements.

3.87 4.33

Recording the tax effects of error correction, and

deciding whether to record the effect in deferred taxes

or not.

3.79 4.22

a Scale: For the ‘‘Overall usefulness of the case’’ question, 1 (highly useless) to 5 (very useful). For all other questions, 1 (strongly disagree) to 5 (strongly agree).

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The latest version of the case was used in Summer 2014 in (1) undergraduate-level

Intermediate Accounting I class of 18 students, (2) undergraduate Intermediate Accounting II class

of 10 students, and (3) graduate Intermediate Accounting I class of 15 students. As another way of

assessing whether student understanding of certain concepts and skills addressed by the case was

improved, a questionnaire was administered to students before the case assignment was handed out,

and also after the collection of the assignment (and class discussion of the case). Students were

asked to indicate on a scale of 1 (not proficient at all) to 5 (quite proficient) their perception about

skills and concepts addressed by the case. Results are presented in Table 2. Although the change

cannot be attributed solely to the experience of case analysis, it is encouraging to observe that the

improvement in the perceived proficiency was statistically significant at the 1 percent level in each

of the skills/concepts.

In the qualitative section of the feedback instrument, students were asked to describe a feature

of the case that they liked the most. The responses to this question include the following comments,

indicating that the case assignment sparked student interest and enhanced student learning beyond

the textbook.

� The case is based on a story in real world, and it was very helpful to apply the topics we learned not only in this class (Intermediate II) but also the previous class (Intermediate I).

� I enjoyed figuring out how the fraud was committed. � Correction of errors and retroactive restatement of financial statements really came alive in

the case. They were very dry and boring topics for me before the case assignment. � I got to know many new things such as clawback provision, and motives for earnings

manipulation. � The case forced me to think critically. Complexity of this real world case will help me

succeed in professional assignments in the future. � The case narrative was fascinating and flowed well. The structure of the requirements guided

me from simple to complex, and eventually taught me to look beyond the obvious and stated.

TABLE 2

Student Perception of Skills Proficiency Before and After the Case

Skill/Concept Before After

Application of the FASB’s Conceptual Framework to address an accounting issue in a

real-world context.

2.38 3.72

Understanding techniques and motivations for earnings management. 2.81 4.00

Making journal entries to correct errors depending on whether the books are closed or

not.

2.64 3.43

Understanding the rationale and effectiveness of using the clawback provision in

compensation contracts.

1.57 3.91

Deciphering the difference between real and accrual-based earnings management. 2.64 3.71

Computing the numerical effect of errors on the financial statements of multiple

accounting periods.

2.36 3.41

Preparing comparative financial statements for retrospective restatements in a real-world

setting (this question was asked only in the Intermediate II course since the

requirement for restatements was included only in that course).

2.78 3.85

Scale: 1 (not proficient at all) to 5 (quite proficient).

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� I liked how it was a real-world case and it gave me an insight into why CFOs do what they do.

� The case narrative was fascinating to read; that the case was real was a bonus. � I liked making journal entries and eventually figuring out how it all worked. � Timely case. I knew Diamond as a company and was able to find many articles on the web

related to the case.

TEACHING NOTES AND STUDENT VERSION OF THE CASE

Teaching Notes and the Student Version of the Case are available only to non-student-member

subscribers to Issues in Accounting Education through the American Accounting Association’s electronic publications system at http://aaapubs.org/. Non-student-member subscribers should use

their usernames and passwords for entry into the system where the Teaching Notes can be reviewed

and printed. The ‘‘Student Version of the Case’’ is available as a supplemental file that is posted with the Teaching Notes. Please do not make the Teaching Notes available to students or post them

on websites.

If you are a non-student-member of AAA with a subscription to Issues in Accounting Education and have any trouble accessing this material, please contact the AAA headquarters office at [email protected] or (941) 921-7747.

REFERENCES

American Institute of Certified Public Accountants (AICPA). 2003. Core Competency Framework. New York, NY: AICPA.

Pathways Commission. 2012. The Pathways Commission Report. Chapter 7: Constructing a foundational body of knowledge. Available at: http://commons.aaahq.org/files/0b14318188/Pathways_Commission_

Final_Report_Complete.pdf

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