Sunbeam committed the following two fraud schemes while Al Dunlap was the company’s Chief Executive Officer (CEO): (1) Improper Timing of Revenue Recognition via Bill Hold Sales, Consignment Sales, and Other Contingency Sales and (2) Overstating Earnings via Improper Use of Restructuring Reserves. A series of detection methods were utilized in each fraud scheme to determine the indicators that proved that Sunbeam was involved in manipulating its financial data. The most utilized method for detecting Sunbeam’s fraud was Financial Statement Analysis. Utilization of Annual Reports and Disclosures were utilized just as much as Corporate Research and Media while Business Plan Analysis was ranked as being the fourth most used. Finally; leadership …show more content…
qualifications and track record wrapped up detection methods with each being utilized at least once during the investigation. Financial Statement Analysis enables end users to better understand the relationship between the financial statements in regards to trend analyses and unexpected differences. There are two methods to properly analyze financial statements: (1) horizontal and vertical analysis and (2) financial ratio analysis. Sunbeam’s auditors utilized the Percentage of Sales and Gross Margin Percentage ratios to determine the likelihood of overstating sales. By the first quarter of 1998, Sunbeam’s Percentage of Sales increased by 20% when comparing the first quarter of 1997. The significant increase in Percentage of Sales indicated that there was a high probability that the sales were overstated from early recognition of bill hold and consignment sales. Therefore, all fictitiously reported sales would remain as debits on the balance sheet while legitimate sales would be credited in Accounts Receivable and debited in Cash. The Gross Margin Percentage enabled auditors to determine the likelihood that Sunbeam experienced a sudden upward or downward fluctuation of sales. Manufacturing companies did not normally experience sudden fluctuations in sales. Therefore, the 14% and 36% decreases between the first two quarters in 1997 and 1998 provided indication that Sunbeam boosted its numbers by decreasing the value of inventory and taking rebates early. In addition, financial statement analysis provided insight into Sunbeam’s second scheme. By reviewing the financial statements, auditors were able to find that Sunbeam had been overstating company earnings through utilizing large one-time charges, restructuring reserves, and cookie-jar reserves. Large-one time charges reported on the financial statements result in inflated earnings. For example, Sunbeam reported restructuring charges totaling $154.9 in 1996’s fourth quarter, which included over-accruals in advertising and litigation reserves flowed back into the company as earnings. The restructuring reserves were first reported on the financial statements when Al Dunlap started his role as CEO. One might assume that the reserves enabled Sunbeam to recognize future expenses earlier. The opposite would be true as well. Reserves were Sunbeam’s way of inflating earnings, but later decreased the reserves from $63.8 million to zero. The rapid decrease in Sunbeam’s restructuring reserves indicated th at they were inflating profits while ignoring accrued expenses. Cookie jar reserves enabled Sunbeam to inflate earnings, but they did not increase cash flow. Instead Sunbeam reported an operating profit as well as a negative cash flow from operations (CFFO). Discovering the fictitious reporting required financial statement analysis to locate the large-one time charges and decreasing reserves that helped inflate company earnings. Annual reports and disclosures were reviewed to prove that something was not right with Sunbeam’s financial statements. Upon review of the Statement of Cash flows, it was discovered that Sunbeam was making a profit, but the CFFO was less than its operating income. The discrepancy showed that reported sales were not generating cash, so they could not be considered legitimate. Financial statement disclosures enable end users to understand the company’s financial operations. By becoming more familiar with Sunbeam’s disclosures, investors would know the policies on revenue recognition and terms for large discounts and extended payments. Sunbeam recognized the revenue on a sale before the customer received his or her goods. Therefore, they were able to overstate sales and profits by promoting more bill and hold sales. Sunbeam reported $35 million in bill and hold sales in 1997, but ended up reversing and restating $29 million as future earnings. Sunbeam’s Annual Report contained a disclosure outlining the company’s aggressive revenue recognition policies. Large discounts and extended payment terms motivated customers to make orders early. Early orders enabled Sunbeam to recognize revenue, which overstated current sales while understating future sales. However, Sunbeam neglected to include this information in the quarterly report disclosures, so they were guilty of channel stuffing as well. By keeping tabs on a company through research and media viewing, investors would be aware of its corporate and financial happenings. Even though Sunbeam refused to disclose its large discounts and extended payments policies, investors were able to read articles on-line to see what the company was offering in terms of discounts. Interviewing customers and staff would be effective in learning more about the company, it was once utilized for due diligence testing during Sunbeam’s 1998 debt offering. Sunbeam was mentioned on the news stating that a new warehouse was being built to house company inventory (which tied in with bill and hold sales). Investors would find out about Sunbeam’s policies on guaranteed sales by reviewing financial statement disclosures as well as looking for media reports. The Securities and Exchange Commission (SEC) made it clear that Sunbeam should not have recognized the $24.7 million in distributors sales if no reserves were recognized. Since Sunbeam was building inventory warehouses, sales would be guaranteed and most likely be overstated. When Sunbeam issued a press release in April stating that the company was not going to reach its March goals, it indicated that company sales were in fact overstated. Issuing the second press release made investors aware that Sunbeam’s financial reporting became questionable. Selecting the right leader is essential to the success of any business and Sunbeam should be no different.
An effective leader is someone who possesses strong moral character, management skills, and a good track record. Al Dunlap handled Sunbeam's turnaround quite similarly to Scott's Paper by cutting costs through eliminating and selling off a number of corporate divisions. Scott Paper was sold to Kimberly-Clark, but success did not last long. Kimberly-Clark had to report a $1.4 billion restructuring charge while Dunlap made out like a bandit. He used intimidation and wealth to motivate employees to follow his lead. Dunlap’s business plan was to increase sales growth by implementing various cost-cutting strategies. Eliminating jobs, research & development, and production ended up hurting Sunbeam more than helping it. During Dunlap’s first days as Sunbeam’s CEO, he implemented a restructuring reserve that arouse suspicion regarding early expense recognition. There was no way that Dunlap’s elaborate down-sizing plan would create sales growth despite the 1997 financial statements. Upon reviewing Dunlap's track record at Scott's Paper as CEO and his overall character, he was not fit to be Sunbeam's CEO even though Sunbeam executives thought he was perfect for the job. With a CEO like “Chainsaw Al” Dunlap, fraud will definitely
occur.
Taking a look at Donald Cressey’s hypotheses which is now known as the fraud triangle depicts the certain criteria for the mind frame of the fraudster. The fraud triangle is a theory that consists of perceived pressures, perceived opportunity, and rationalization. It gives us the different pressures placed on individuals that would make them consider “cooking the books.” It also demonstrates where the possible opportunity lies so that we may take precautions to eliminate the opportunity. Last, it demonstrates how a fraudster rationalizes with themselves to make committing the fraud okay. Donald Cressey believes all three elements must be present for fraud to occur. Upper management is usually the focus of financial statement fraud because financial statements are done at the management level. So in this case financial statement fraud was committed by the CEO Gregory Podlucky
Madura, Jeff. What Every Investor Needs to Know About Accounting Fraud. New York: McGraw-Hill, 2004. 1-156
Financial Shenanigans was written by Howard Schilit. The main objective of the book is to show ways companies can alter their financial accounting reports to reflect a much attractive appearance of their company’s health and growth when indeed that company is running into severe trouble. There are different ways the company can accomplish this and the author gives us “Seven Shenanigans” that companies can change the investor’s point of view towards the performance of the company. Basically, he breaks up each chapter to the particular shenanigan and discusses different techniques for achieving each shenanigan. For example, the author used Priceline.com, Cendant/CUC, AOL, and Xerox to illustrate each shenanigan. Chapter 11 and 12 of the book discusses the analyzing of financial reports and how to use financial databases to discover warning signs. Then there is another chapter on finding shenanigans in the company’s annual 10K report and how to find hints for financial shenanigans.
Sears Holdings is a company in transition. Now, faced with adversity and the threat of bankruptcy looming its leadership has come under scrutiny. “Great leaders not only have drive; they want to lead. Also important is a high need for power, a preference to be in leadership rather than follower positions. A high power need induces people to attempt to influence others, and sustains interest and satisfaction in the process of leadership. When the power need is exercised in moral and socially constructive ways, rather than to the detriment of others, leaders inspire more trust, respect, and commitment to their vision (Bateman, pp 399, 2007).”
Dunlap had used manipulative accounting techniques to report a profitable of Sunbeam’s financial result. According to SEC Finding, the manipulative accounting techniques are used as following...
The SEC determined that Sunbeam filed quarterly and annual reports that had false financial statements and failed to make required disclosure. Subsequently the SEC findings went on to state “Sunbeam's books and records were manifestly inaccurate on so many items and over such an extended period of time as to indicate complete failure of internal controls in violation of Sections 13(b)(2)(A) and 13(b)(2)(B).” (U.S. Securities and Exchange Commission,
When Robert Horton left his position as Chairman and CEO of BP, the company was in financial trouble and the employee morale was notably low. The company was experiencing losses, the debt-to-equity ratio was out of control, and the company had positioned itself in so many diverse markets that most of the employees had no idea what the company mission and goals were. When David Simon took over as CEO, he was faced with the daunting task of turning the wayward company around. Simon accomplished this task for three reasons: he diagnosed and modified the organizational culture; he possessed important leadership skills; and he knew how to motivate employees.
In modern day business, there can be so many pressures that can cause managers to commit fraud, even though it often starts as just a little bit at first, but will spiral out of control with time. In the case of WorldCom, there were several pressures that led executives and managers to “cook the books.” Much of WorldCom’s initial growth and success was due to acquisitions. Over time, WorldCom discovered that there were no more opportunities for growth through acquisitions when the U.S. Department of Justice disallowed the acquisition of Sprint.
For those who do not know what fraud is, it’s basically deception by showing people what they want to see. In business it’s the same concept, but in a larger scale by means of manipulating figures that will be shown to shareholders and investors. Before Sarbanes Oxley Act there was “Enron Corporation”, a fortune 500 company that managed to falsify their statements claiming revenues over 101 billion in a span of 15 years. In order for us to understand how this corporation managed to deceive the public for so long, the documentary or movie “Smartest Guys in the Room” goes into depth by providing viewers with first-hand information from people that worked close with or for “Enron”.
The Tyco accounting scandal is an ideal illustration of how individuals who hold key positions in an organization are able to manipulate accounting practices and financial reports for personal gain. The few key individuals involved in the Tyco Scandal (CEO Kozlowski and CFO Swartz), used a number of clever and unique tactics in order to accomplish what they did; including spring loading, manipulating their ‘key-employee loan’ program, and multiple ‘hush money’ payouts.
The fraudulent financial reporting is the information in financial statement that will misleading, omission, and misrepresenting the users in order to attract potential investors and fulfil the shareholder’s expectation wealth. The company may has intended to use wrongly the accounting principle which related to classification, method of depreciation,
In many circumstances, employees’ behaviors are likely to follow their leader. Enron’s leadership has been extremely influential due to exemplified charismatic. For example, Heffrey Skilling and Kenneth Lay, CFO and one of executive member in Enron, greatly encourage employees to follow their lead. Their incompetence accounting profession directly affects lover level of employees. Eventually, those manipulating accounting activities affect company collapse. Once leadership has done unethical professional accounting behaviors, unethical acts become accepted. Employees have many reasons for remaining quiet. While Enron still have ethical internal rules, when leadership in Enron did not abide and did not provide corresponding example of employees to follow (Prentice 2003, p. 417). Which eventually make Enron’s become one of the largest corporate scandal frauds.
Dowd (2016) runs above and beyond with the clarification to state accounting fraud incorporates the change of accounting records in regards to sales, incomes, costs and different components for a profit motive, for example, boosting organization stock prices, getting ideal financing or maintaining a strategic distance from obligation commitments. Dowd is of the feeling that covetousness, absence of straightforwardness, poor administration data and poor accounting interior controls are a couple of explanations behind accounting fraud. (Dowd,
It is difficult to be an excellent leader of an organization nowadays. There are many challenges faced by a leader and they need to have specific leadership skill to solve the problems. Sunway Group had faced several challenges and its leader Jeffrey Cheah success to solve the problems and lead the company to a success phases.
People always talk about how important it is for companies to have a good leader, someone who not only keeps the blue numbers, but also achieves a loyalty from customers, pleasant working environment, successful business partnerships and ahead of the competition.