Krispy Kreme Doughnuts, Inc. has been ordered by a special committee of independent directors charged with studying the company’s finances to restate and reduce its past earnings by $25.6 million over several years.
According to a committee report released last week, the directors recommended Krispy Kreme reduce earnings by $22.2 million for the period 2001-2004 and by another $3.4 million for previous periods.
“The Krispy Kreme story is one of a newly public company, experiencing rapid growth, that failed to meet its accounting and financial reporting obligations to its shareholders and the public,” the committee wrote in the report. “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 (per share) each quarter.”
In its report, the committee didn’t suggest the accounting errors were made purposely, but said a number of unanswered questions surrounding the issue remain.
“The number, nature and timing of the accounting errors strongly suggest that they resulted from an intent to manage earnings,” the report said. “But we never received credible explanations for transactions that appear to have been structured or timed to allow for the improper recognition of revenue or improper reduction of expense.”
Five Krispy Kreme executives resigned and one retired in June after the committee recommended the officers who were responsible for the accounting errors be discharged from the company (PROMO Xtra June 28). The six executives, who were not named, included four senior VPs who worked in the company’s operations, finance, business development and manufacturing and distribution departments.
The Winston-Salem, N.C.-based company remains under investigation by the Securities and Exchange Commission for financial woes. Krispy Kreme also faces a number of shareholder lawsuits, which have been consolidated against the doughnut maker alleging that it “issues false and misleading statements, including false financial results.”
In January 2005, Krispy Kreme retained Kroll Zolfo Cooper LLC to manage and help restructure the company. Since the, KZC has closed unprofitable factory stores and hired a new chief accounting officer. As part of its ongoing work, KZC plans to develop new product offerings for the company and develop new store concepts.
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