Free Sample In Account Fraud Case Study

CASE BACKGROUND

After being formulated in 1897, Sunbeam performed extremely well till the high inflation of 1980s. In 1988 the company bankrupted due to high economic depression. In 1990 Michael Price, Michael Steinhardt and Paul Kazarian acquired the company and made it public as Sunbeam-Oster in 1992. During the period of 1990 to 1996 the company’s share prices where highly volatile and company was surviving to remain in competition. A sudden change was seen in the share prices of Sunbeam Corporation when it was announced that Albert J. Dunlap joining the company as CEO in July, 1996 (Byrne, 1999). He was known as role the model for managers and hero of the American investors. With the announcement that Chainsaw Al is joining Sunbeam the stock of Sunbeam was raised by nearly 60% which was the largest one day jump in the history of New York Stock Exchange (Byrne, 2002).

Suddenly the company became major player of the industry with dramatic change in its stock prices, sales and net income. All the financial results were higher than the analyst expectations. One side the Dunlap was giving unexpected positive results to the company and on another side he was making some major changes such as eliminating 87% of the company's products, cutting 50% of employees and closing 37 of 61 warehouses, 18 of 26 factories and 39 of 53 facilities. The logic behind this dramatic boost in performance was identified in the next year and Dunlap and Sunbeam were being sued for violating the SEC Act of 1934 for misguiding the material information in the business operations.

ANALYSIS OF THE CASE

It is must for the public limited companies to share true information with their investors so that that can make effective investment decisions. For doing so a public company has to issue its financial reports on annual basis so that different stakeholders can identify the performance of the company. After the joining of Dunlap, Sunbeam Corporation not only became the industry leader but also its financial figures were boosting (Fastenberg, 2010). But even after this improved performance of the company there was no big change in the wealth of shareholders. The bill-and-hold strategy of Dunlap became a major issue of concern after identifying that this strategy was the key force behind this financial boost. This strategy is commonly used when the management is focused towards meeting certain conditions for a transfer of ownership occur. In this form of sales arrangement the seller dose not ship the products until a later date even after billing a customer for it (Karpoff and Martin, 2008). This setting makes a significant impact on revenue of the company as the immediate sales start boosting.

The application of bill-and-hold strategy boosted the revenue of Sunbeam Corporation for a short period. Several other ways were used by Al for achieving the short term targets. The bad financial condition of the company was disguised in financial results through the use of earning management techniques. The cookie jar accounting was used by the Dunlap for increasing the expenses through fake reserves (Twomey, 2010). Thus, the use of such accounting technique was the major reason why shareholders wealth did not increase even after the record performance of the company. So, basically there is no doubt that Dunlap was boosting the financial performance of company but at the same time he was misguiding the investors. On the other hand he was also not increasing their wealth.

After being the CEO Dunlap eliminated most of its senior executives from the company and established new management team with 25 partners who worked with him perilously. It indicates that Dunlap wanted to give the opportunities to people he already knows. Dunlap underestimated the current employees and employed known people on the basis of their success in previous works. It was completely irrelevant to nominate them by replacing current employees (Hatfield and Webb, 2010). As per the theory of Kant all the employees should be treated equally and termination of old team is violating of employment rights (Erickson, Hanlon and Maydew, 2006). Giving opportunities to only known persons is also against the ethics. The principle of equal liberty was also contravened by Dunlap as he didn’t encourage fair treatment to each employee (Chen and Salterio, 2012). Hence, Dunlap should treat all their employees equally.

In 1996, company was financially surviving due to massive operating loss and the financial analysis indicates that in next year (1997) company’s financial condition was quite sound. The ratio analysis (Find in Appendix 1) indicates that company was having huge loss in 1996 with net profit margin of (-23.2%), suddenly started earning profit margin of 9.4% which seems highest in last four years. On the other hand return on investment was (-57.8%) in 1996 which increased to 20.5% in 1997. The financial analysis provides a clear sign of misleading information as such kind of improvements look irrelevant in real life (Eitan and Steve, 2006). The total value of company was calculated as $4billion on March 2, 1998 by multiplying the stock price of $45.63 with the weighted average common shares outstanding of 87,542,000 (Subrahmanyam, 2005). On the other hand same calculation for the last year indicates a value of $1.9 billion. It is completely irrelevant that company’s value get double in only few months. Now, it is the major question that either the company’s value is $2 billion or $4 billion as it is going to affect financing of the acquisitions with the worth of $2.5 billion (100%) and its one third parts was being financed through stocks worth $180 million (33%).

You can also read: Case Study of Auditing and Assurance

If it is assumed that company will finance through $1 billion (42%) additional debt then also it will require $588 million (25% = 100% - 33% - 42%) for the acquisitions. This reaming amount will need to be paid in cash. According to the financial data provided in the case, Sunbeam only had $52.3 million in cash and cash equivalents at the end of 1997 than from company is going to get other $536 million in just couple of months. From the financial point of view it looks quite irrelevant to arrange such a huge amount from additional debts and if company go for this option than investors are likely to have huge lose in future when the fragile reality of these acquisitions hit them (Karpoff and Martin, 2008).

CONCLUSION AND RECOMMENDATIONS

Thus, on the basis of above analysis it can be concluded that steps taken by Dunlap were not focused towards maximising the wealth of investors. However, the decisions helped in earning huge profit in short term but in long term investors were likely to have massive loss. As a public organization it is the responsibility of the manager to publish its financial statements on annual basis so that investors can make effective investment decisions but in case of Sunbeam false information was published by the company which could harm the interest on investors. On the other hand different unethical decisions were made by Dunlap such has eliminating the old management team and employing all the known persons.
After undertaking this study, it can be recommended that the decision making process should be improved. Rather than eliminating all the old managers Dunlap could use their experience as advisors. On the other hand, Dunlap could also hire top talent in industry rather than own knowing persons. From financial point of view focus should be given to investors wealth rather than own interest.

REFERENCES

• Byrne, J.A. (1999). Chainsaw: The Notorious Career of Al Dunlap in the Era of Profit-At-Any-Price. NY: Harper Collins.
• Chen, Q. And Salterio, S.E. (2012). Do changes in audit actions and attitudes consistent with increased auditor scepticism deter aggressive earnings management? An experimental investigation. Accounting, Organizations and Society. 37(2), pp. 95-115.
• Eitan, G. and Steve L. (2006). An equilibrium model of incentive contracts in the presence of information manipulation. Journal of Financial Economics. 80(3), pp. 603-626.
• Erickson, M., Hanlon, M. and Maydew, E.L. (2006). Is There a Link between Executive Equity Incentives and Accounting Fraud? Journal of Accounting Research. 44(1), pp. 113-143.
• Hatfield, P. and Webb, S. (2010). Sunbeam Corporation: A Forensic Analysis. Journal of Business Case Studies. 6(1), pp. 63-74.

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