INSIGHT-Seeds of trouble sown at Diamond Foods years ago

Mon Mar 19, 2012 8:59am GMT

* Timing of payments to walnut growers raised questions

* Leap in profit margins didn't "make sense" -accountant

* Did corporate governance allow for conflicts of interest?

By Nanette Byrnes, P.J. Huffstutter and Mihir Dalal

March 19 (Reuters) - The accounting scandal at snack maker Diamond Foods in recent months may have shocked shareholders and some California walnut farmers. But a number of accounting and industry experts spotted red flags some time before.

A close examination of business practices at Diamond Foods , the nation's largest walnut processor and maker of Emerald nuts, points up a number of warning signs, including unusual timing of payments to growers, a leap in profit margins, and volatile inventories and cash flows.

The picture that emerges is of a company that for years seemed to push hard on every lever to meet increasingly ambitious earning targets and allowed top executives to pull in big bonuses, according to interviews with former Diamond employees and board members, rivals, suppliers and consultants, in addition to reviews of public and non-public Diamond records.

The company declined to make executives or board members available for this story, or to answer any specific questions, but made this statement through a spokesperson:

"Diamond and its advisers are making substantial progress strengthening the company's financial reporting and control capabilities and restating Diamond's consolidated financial statements for fiscal years 2010 and 2011."   Continued...

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