Problem: Diamond Foods produces and markets Emerald snack nuts, PopSecret popcorn, and several other snack brands. The Securities and Exchange Commission (SEC) recently charged Diamond and two of the company's former executives (the CEO and the CFO) with misleading investors by fraudulently manipulating income (see "Diamond Foods to Pay $5 Million to Settle SEC Fraud Charges," Wall Street Journal, January 9, 2014.) The cost of walnuts increased steadily in 2010 and 2011. A core part of Diamond Foods' business model was to purchase walnuts from growers and then resell the walnuts to retailers. Diamond found that it could not meet its earnings estimates as the cost of walnuts increased. To help to meet earnings estimates, the CFO (Steven Neil) instructed his finance team to pay the walnut growers two special payments per year. These special payments were to pay the walnut growers for the increased cost of walnuts. However, Diamond then booked these payments for prior walnut shipments as advance payments for walnut crops not yet delivered.

Questions: 1. Were the special payments to the walnut growers illegal or fraudulent?

2. How (what accounts) did Diamond book the fraudulent payments? Write the journal entry that could have been made when a payment was made to the walnut growers. If you do not know the exact account impacted, describe the account.

3. What accounts should have been impacted by the special payment to the walnut growers?

4. Do you think this fraud scheme could have been sustained by Diamond over several years? Why or why not?