Business finance concepts and contemporary press applications

Business

Recently, Krispy Kreme Donuts announced that they would restate their fiscal earnings statement.

Their news comes in the wake of a huge number of restatements came from corporate America, many at least somewhat related to the Enron and WorldCom scandals regarding misleading numbers being issue to shareholders via these statements. Dennis Milton, in BusinessWeek's online edition, explored this restatement as of 1/19/05, the general rationale behind restatements for corporations, and how they affect the finance community as a whole.

Milton introduced the topic by summarizing recent events in Krispy Kreme's financial world -- the retirement of CEO Scott Livengood, the detrimental effect of the low-carb diet craze on the company's stocks, and investor concerns regarding the stock and company as a whole. Milton notes that despite shareholders' excitement at this resignation and the new direction which it could signal for Krispy Kreme, the general consensus in the financial world was that Krispy Kreme had more significant issues than leadership, namely, discrepancies in their accounting disclosures and concerns about store-level profitability, both vital issues for individual stockholders.

These accounting problems, mainly in the form of accounting financial statements, included an official Securities and Exchange Commission inquiry about the accounting procedures in certain markets as well as an announcement that the company would restate its fiscal-year 2004 earnings, anticipating that this restatement would shift earnings "downward due to purchase-accounting revision and [the corporation] warned that future quarterly statements might also be affected by similar issues." How are these developments relevant for individual investors? First, and most obviously, investors who based their individual stock purchases on the numbers given in the original financial statement issued by Krispy Kreme. The Du Pont system, which focuses on expense control (profit margin), asset utilization (total asset turnover), and debt utilization will most definitely be altered by the restated numbers-for example, Krispy Kreme's ability to realign its business model with lower growth expectations, as noted by Milton, may cause significant changes to its projections of profit margin, asset turnover, and expected debt. In turn, the Return on Equity, which is calculated my multiplying the Du Pont variables listed above, will most definitely be altered. The potential for return is, naturally, one of the most relevant factors for investors in determining if a stock is a worthy investment, and if so, how much of it to buy. A "downward" change in the ROE will most likely have a detrimental effect on stockholders who bought the Krispy Kreme stocks based on their projected profit margins, asset utilization and debt projections.

Another factor involved in the Krispy Kreme restatement is the news that an SEC investigation will be undertaken. As the main concern of a publicly-held corporation ought to be profitability for the shareholders, any potential criminal or Sarbanes-Oxley violations are deleterious to these investors, and would most likely have created hesitation on the part of investors to buy Krispy Kreme if these actions had been announced earlier. The potential negative effects of these investigations and restatements will almost certainly decrease the company's ROE as well as projected profit margins.