11.Krispy Kreme was involved in an accounting fraud where the company reported f
ID: 2600647 • Letter: 1
Question
11.Krispy Kreme was involved in an accounting fraud where the company reported false quarterly and annual earnings and falsely claimed that, as a result of those earnings, it had achieved what had become a prime benchmark of its historical performance, that is, reporting quarterly earnings per share that exceeded its previously announced EPS guidance by 1 cent. One method used to report higher earnings was to ship two or three times more doughnuts to franchisees than ordered in order to meet monthly quotas. Would you characterize what Krispy Kreme did as earnings management? Explain.
Explanation / Answer
Solution:-
Yes. It was common practice for Krispy Kreme to accelerate shipments at the year end to inflate revenues by stuffing the channels with extra product, a practice known as channel stuffing.
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