In February 2012, the Wall Street Journal reported that Diamond Foods Inc. fired its CEO and CFO, and would restate financial results for two years. The restatement was required after the company found that it had wrongly accounted for crop payments to walnut growers. The investigation focused primarily on whether payments to growers in September 2011 of approximately $60 million and payments to growers in August 2010 of approximately $20 million were accounted for in the correct periods. Shareholders suing the company allege the payments may have been used to shift costs from a prior fiscal year into a subsequent fiscal year. As part of the internal investigation, the audit committee did not uncover any evidence of intent to deceive shareholders. Rather, the situation was described as a breakdown of controls. In a February 2012 filing with the SEC, the audit committee stated that Diamond has one or more material weaknesses in its internal control over financial reporting.
a. Does the restatement suggest that the company's internal controls contained a material weakness? Explain your rationale.
b. In September 2011, the company filed its annual report with the SEC for its fiscal year ended July 31, 2011. As part of that filing the company maintained that it had effective internal controls over financial reporting as of its year-end date. Do you believe that management's report on internal control over financial reporting was accurate?
c. In February 2012, the audit committee indicated that the company had ineffective internal controls. What types of material weaknesses do you think might exist at Diamond?