Fermenting Accounting Problems at Vermont Kombucha Corp.

Founded in 2005, Vermont Kombucha Corp. (V-Ko) was an early mover in the fledgling U.S. market for kombucha, a drink brewed for its health benefits. Early on, the company captured more than 90% of market share. Under the leadership of its founder and CEO, Joe Williams, V-Ko went public in 2015. On the first day of trading, V-Ko’s shares doubled in price, and the company closed the year with a market capitalization of approximately $2.5 billion. However, the company’s growth began to slow as competitors entered the market. Though V-Ko’s market share began to shrink, Williams continued to set aggressive sales targets that were increasingly difficult to reach. In 2018, the company missed its first-quarter earnings target. The company shifted its control systems and company culture, resulting in pressure on salespeople that led to the use of questionable tactics to meet sales and compensation goals. Following a tip from an anonymous employee whistleblower, V-Ko launched an investigation in 2020 that revealed overstated revenue and overstated inventory stemming from lax internal controls.

Stepping into the perspective of new leadership at V-Ko, students will discuss the company’s business model, sales practices and employee incentives, internal control systems, and financial reporting issues around revenue recognition (specifically sales returns) and inventory valuation (specifically obsolete inventory). Students will also consider what actions, if any, should be taken against those involved in the accounting scandal and how to improve corporate governance and rebuild trust with investors.