When is a doughnut hole a real doughnut hole

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Reference no: EM131808061

When is a Doughnut Hole a Real Doughnut Hole?

Krispy Kreme presented one more homegrown success story when it tendered its initial public offering to investors in April 2000. From its humble beginnings in 1937 in Winston-Salem, North Carolina, Krispy Kreme became a sensation whenever a new store was opened. In the mid-1990s, Krispy Kreme changed its strategic focus from slow growth to an aggressively fast franchise growth. From 2000 to 2004, Krispy Kreme grew from 144 to 357 stores. It reached its pinnacle of favorable press when Fortune magazine called it the "hottest brand in America."

Customers would wait in line for the change to get one of the freshly baked dough-based products. However, like the sprinkles on top of the doughnuts, the financial information given to investors seemed artificial and sugar coated. With such a bold entrance into the national spotlight, Krispy Kreme became trapped in the age-old game of constantly having to increase its financial performance to satisfy the premium that investors were paying for the stock.

In a special investigation, the Securities and Exchange Commission (SEC) laid most of the blame on former chairman and CEO Scott Livengood and former chief operating officer John Tate. The SEC alleged that Livengood and Tate "managed" Krispy Kreme's earnings to ensure they would always achieve their financial targets. As was the case with HealthSouth and WorldCom, Krispy Kreme established an earnings per share (EPS) target for investors and always beat that amount by one cent so the company could always say that it had exceeded Wall Street expectations. Bonuses for the top managers of Krispy Kreme were linked to surpassing the EPS forecast.

One method that Krispy Kreme used to manipulate its revenue was to ship doughnut-making equipment with high margins to the franchise owners before they requested the equipment. However, as an incentive to the franchise owners to allow this to take place, they did not have to actually pay for the equipment until they needed it. Nevertheless, Krispy Kreme booked the selling of equipment as revenue and had the equipment stored in trailers owned by the company until they were needed by the franchise owners. In a related manipulation of financial statements, Krispy Kreme booked the revenue from the equipment just before the franchise was bought by the corporate entity. Krispy Kreme then bought the franchise at an inflated price, which included the new equipment in the total purchasing price of the franchise.

The SEC report also disclosed the entitlements that the Krispy Kreme CEO Scott Livengood believed he deserved to receive. Those perks included using the corporate airplane, which accumulated more than $320,000 in costs for personal travel in 2 years. To support the literary arts, Livengood also had Krispy Kreme franchise owners cover part of the cost of the half-million dollar "storytelling festival" that took place in Livengood's wife's hometown. The festival was sponsored partly by money paid by franchisors through Krispy Kreme's "brand fund" program.

two paragraphs per question, & APA reference please.

Thank you so much!

1. What do you think the underlying reason why Krispy Kreme started having ethical problems?

2. How does shipping equipment manipulate Krispy Kreme's financial statements?

3. Do you think the CEO receiving perks from Krispy Kreme is unethical?

Reference no: EM131808061

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