Accounting & Tax

Committee Dunks Krispy Kreme

Its report accuses former Krispy Kreme executives of intentionally managing earnings, adding that the company ''failed to meet its accounting and f...
Stephen TaubAugust 10, 2005

Krispy Kreme Doughnut Inc.’s special committee of two independent directors clearly didn’t sugarcoat its report on the company’s accounting practices.

The report accused former Krispy Kreme executives of intentionally managing earnings, adding that the company “failed to meet its accounting and financial reporting obligations to its shareholders and the public.” It also directed the company to restate earnings downward by $25.6 million, mostly for the years 2001 through 2004 and the first three quarters of 2005, and implement a slew of corporate governance changes.

The special committee noted that while some may see the accounting errors as relatively small in magnitude, “they were critical in a corporate culture driven by a narrowly focused goal of exceeding projected earnings by a penny each quarter.”

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

The report singled out former chairman and chief executive officer Scott A. Livengood and former chief operating officer John W. Tate, asserting that they bear primary responsibility for the “failure to establish the management tone, environment and controls” essential for meeting Krispy Kreme’s responsibilities as a public company. (See “Don’t Blame Atkins, in the CFO Blog, for more on management’s shortcomings.)

“Krispy Kreme and its shareholders have paid dearly for those failures, as measured by the loss in market value of the company’s shares, a loss in confidence in the credibility and integrity of the company’s management and the considerable costs required to address those failures,” added the report.

The special committee, established by Krispy Kreme’s board in October 2004, was co-chaired by Michael H. Sutton, former chief accountant of the Securities and Exchange Commission, and Lizanne Thomas, a senior partner of law firm Jones Day. They were assisted by legal counsel Weil, Gotshal & Manges LLP and Smith Moore LLP and a forensic accounting team from Navigant Consulting Inc.

According to the committee, the earnings revisions are currently estimated to decrease pre-tax income by $1.1 million in 2001, $1.9 million in 2002, $2.1 million in 2003, $13.9 million in 2004, and $3.2 million in the first nine months of fiscal 2005. In addition, the committee’s report calls for a restatement of $3.4 million for periods prior to fiscal 2001.

The committee also directed the company to implement a number of governance changes, including reconstituting the board by filling it with independent directors (other than the CEO); ensuring that a “substantial majority” were not serving at the time of the events the committee investigated; and eliminating the position of emeritus director.

Other required changes include ensuring that the board receives timely, accurate, candid, and balanced information about all material issues; substantially bolstering the company’s resources in the areas of accounting, financial reporting, and internal audit; and changes in the areas of controls, compliance, public disclosure, and compensation.