1. Why did the round-trip transactions engaged in by Krispy Kreme and its franchisees violate revenue recognition rules? How should they have been recorded under GAAP?
2. Evaluate the corporate governance at Krispy Kreme during its financial statement fraud including management’s stewardship responsibility to owners.
3. Krispy Kreme had materially misstated its financial results in an effort to manage its earnings. Subsequently after the fraud was detected, the company restated its net income for 2003 and 2004. What are an auditor’s responsibilities to detect material misstatements in the financial statements? What should an auditor do after discovering material accounting irregularities? In other words, how should an auditor correct for the fact that in the current year it was discovered that a previous years’ financial statements were materially misstated?
4. Prime accounting issues with respect to accounting for franchise activities include how to recognize revenue on the individual sale of franchise territories and on the transactions that arise in connection with the continuing relationship between the franchisor and franchisee. The Krispy Kreme case describes three transactions between the company and its franchisees that created false earnings. Review FAS No. 45, Accounting for Franchise Fee Revenue, and explain specifically how Krispy Kreme’s transactions violated SFAS 45.