Report Issued on Krispy Kreme’s Mess
By George Anderson
An internal investigation and report by a special committee named by Krispy Kreme’s board of directors doesn’t come straight out and accuse former CEO Scott Livengood of fraud but it did say that he set the tone for a company “that failed to meet its accounting and financial reporting obligations to its shareholders and the public.”
Mr. Livengood and outside directors were faulted for “profiting greatly” from business practices and accounting errors designed to help the committee exceed the quarterly earnings expectations of Wall Street analysts and boost the company’s stock price.
Under Mr. Livengood, the company held an objective of beating analysts’ earnings estimates by a penny a quarter. Executive bonuses were tied directly to meeting this goal.
One of the methods used by Krispy Kreme to boost earnings while Mr. Livengood ran the company was the practice of shipping doughnut-making equipment to franchisees before it was needed. After making shipments, the company booked revenue even though the equipment often went unused, sitting in trailers owned by Krispy Kreme. Franchisees did not begin paying for the equipment until it was actually installed.
F. Joseph Warin, an attorney representing Mr. Livengood, said his client was pleased that the investigation had been completed but took issue with the report’s tone. “We strongly disagree with the subjective speculation of the report. Mr. Livengood devoted his heart and soul to Krispy Kreme,” he told The Wall Street Journal.
Krispy Kreme’s former chief operating officer, John Tate, was also singled out for criticism. According to the findings of the report, Mr. Tate appeared “to have been directly involved in inappropriate efforts to increase or accelerate the recognition of revenue.”
Mr. Tate’s attorney, David Siegel, said his client “denies any wrongdoing.”
Moderator’s Comment: What went wrong at Krispy Kreme? What can be done to avoid situations such as what happened at Krispy Kreme and in similar situations
elsewhere?
Michael Sutton, a former chief accountant of the Securities and Exchange Commission (SEC), and Lizanne Thomas, a partner in the law firm of Jones Day in
Atlanta, led Krispy Kreme’s internal investigation. –
George Anderson – Moderator
I’m not wanting to make excuses for what is clearly sloppy or fraudulent accounting in many of these companies. But it is important to note that in spite of FASB rules, etc., there is PLENTY of ambiguity in accounting. It is NOT just like balancing your checkbook. Given the ambiguity of what an asset is worth, when did the earning exactly occur, at what point does something really become a liability, what money is being spent that actually has a long term value and should be metered out over that time period (depreciation or amortization,) etc., etc. it is no wonder that there are real questions as to whether fraud, sloppiness or incompetence is involved.
I’m glad the courts are rendering judgments in some of these cases, but I have no confidence that the results are really reflective of fairness, to employees, investors or the responsible parties.
The accounting crisis is being managed, but the real crisis is the store-level double-digit sales decreases. No company can withstand this level of decline for long. It is not clear to me that management has a profound understanding of what is causing the decreases.
Certainly the competition (Dunkin’ Donuts and Starbucks) seems to be doing fine.
What KK doesn’t get and the DD people did (@Allied Domeq/Pernod – future owners) is that it’s the coffee. If your pants don’t fit, you can stop eating a doughnut, but coffee (great coffee) is not fattening and will keep people hooked and coming back. KK only has mediocre coffee at best and if they were to address that then they could come out OK in the long run.
What went wrong at Krispy Kreme?
After its high-powered Hollywood-hype a few years ago by rail-thin women and guys on nutritional supplements, too much dough was then hidden by excessive glazing.
What can be done in the future to prevent similar occurrences?
All executives and directors could try playing by the rules. Integrity is a great operational compass.
Will Krispy Kreme come back? Maybe, perhaps Wal-Mart could buy them. Otherwise, that fiercely loyal (short-term) army that once only sought KKs has shrunken calorically and invisibly.
After the accounting mess is cleaned up, it should be relatively simple for Krispy Kreme to get back on track. The big thing they had going for them for years was limited availability. When the donuts were only available in a limited geography, they achieved the cult-like status enjoyed by several trendy brands. When Krispy Kreme franchises started popping up around the country, they played the same card at the market level, by focusing on a few hours when the donuts were coming fresh off the line.
How quickly this brilliance dumbed down. I have no clue why a shopper would buy a box of these things in a supermarket, which may have a fresher offering from its own bakery sitting a few feet away. Talk about perception confusion; no contamination! So here’s the simple part: pull back a bit. Get more hard to find. Keep the satellite locations that really are fresh baked. This is simple because finances will likely dictate some cost cutting and the Atkins thing seems to be fading. It may mean that some retailers will need to rethink their bakery offering, but what is wrong with that?