Thursday, May 7, 2009

Holes in Krispy Kreme's Accounting

n March 4 this year, the SEC settled administrative charges against Krispy Kreme Doughnuts, Inc. the U.S. doughnut retailer. During 2003 and 2004, the SEC claimed that Krispy Kreme improperly accounted for its executive bonus plan in order to report earnings at, or one cent above, its earnings guidance. Krispy Kreme, without admitting or denying the SEC’s charges, agreed to cease-and-desist from future violations of provisions of the federal securities laws.

Bonuses were contingent upon Krispy Kreme meeting or exceeding goals for return on assets and a percentage increase in EPS.

The SEC stated that Krispy Kreme operated its bonus plan “as a de facto reserve accounting mechanism.” Rather than accruing bonuses during the year based on projected annual EPS, the SEC alleged that Krispy Kreme accrued bonus amounts equivalent to any profits over one cent above its EPS guidance in weak quarters, and in weak quarters, reversed previous accruals to meets its quarterly EPS guidance plus one cent, and accordingly trigger bonuses.

The SEC settled actions with four former Krispy Kreme executives, including the former Chairman, President and CEO, COO, CFO, and Senior Vice President of Finance. Without admitting or denying the SEC’s charges, their individual settlements included disgorgement of bonuses and fines suspensions from SEC practice.

1 comment:

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