The issue
The reports of any organization should reflect the position of the company as it is. However, regardless of this requirement, managers may at times choose to manipulate the books of the organization to reflect the organization, as they want. Such is the case with Diamond Foods. Referring to the contradicting information presented by both the management and representatives, there seems to be an evident manipulation of the accounting procedures if the authority of the representatives is reasonably within their jurisdiction. Based on the given information, it is possible that the company has shifted the previous year’s cost to this year’s by booking the payments of the past year as payments in the present year to pad last year’s earnings. Such a presentation would be a violation of the generally accepted accounting principles (GAAPs).
Techniques used
A close examination of the report establishes two possible techniques that the management seems to have used to manipulate the income of the organization. These are “Cookie-jar” Reserves and Operating activities. Any of the above methods would affect the financial statements consequently.
“Cookie-jar” Reserves
In accounting, the accrual of expenses is to reflect the period in which the expense accrues as opposed to the payment period of the bill (Wood and Sangster 136). For instance, if a company bought a vehicle in 2010 and paid in 2011, the accrual of expenses requires that the accounting for the payments accrued for 2010. Firms when faced high earnings and thus high liability may accrue future expenses to reduce the liability if those expenses are important to the organization in the future. The phrase “taking a cookie from the jar” applies when referring to this strategy of reducing strong earnings by the organization.
Operating activities
Managers have the ability to influence the operating activities of the organization n a way such that the accounting system will record those activities at the time most convenient to the management. In such a case, the activity affects only the comparability of statements and not the long-term profitability of the organization (Wood and Sangster 142). In this particular case, the management seems to have used this method to shift last year’s costs to this year thus padding last year’s income.
Violation of GAAPs
If these allegations prove to be true, the management will have breached the requirements by the GAAPs. More precisely, it will have breached the Principle of periodicity and the Principle of prudence. The first principle requires that all entries must be entered in their respective periods and if they cover different periods, then they be appropriated accordingly (Bragg 669). There seems to be a violation of this, as the previous year’s payments records are not as expenses for that particular year if indeed the payments were for the previous year’s walnuts from the growers. Secondly, there is a violation of the principle of prudence if the allegations are true. As per this principle, the management should present the organization “as it is” and not manipulate the entries of the accounting system to present the organization as desired- something that seems to have been done.
Conclusion
From the discussion above, it is evident that the fate of this issue is solely dependent on the authority Diamond Foods representatives. If the final establishment is that their position allowed them to make informed judgments on the statements they made, then the management will have violated the requirements of GAAPs.
Works Cited
Bragg, Steven. The Ultimate Accountants’ Reference: Including GAAP, IRS and SEC Regulations, Leases and more. Hoboken, New Jersey: John Wiley & Sons, 2010.
Wood, Frank, and Alan Sangster. Business Accounting UK GAAP Volume 1. London: Pearson education, 2008.