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Sunbeam Case Solution

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1. Analyze the changes that Al Dunlap had initiated at Sunbeam after being hired from a strategic perspective. Did the changes started by Dunlap allow him opportunities to manage earnings?

From the case readings, I believe certain changes made by Al Dunlap allowed for earning management. The facts below strengthens this assertion:

  1. Huge restructuring charge of $337.6m: Keeping in mind the downward performance of the firm, Mr. Al Dunlap employed the “big-bath” accounting practice, which allowed for increase in provisions for expenses that was later reversed to boost future earnings. Being newly appointed as the firm’s CEO, expectations were high and he saw the need to leverage this tactics to get greater credit for turning around the firm.

  1. Divestiture of non-core businesses and reduction of company personnel: The cost cutting measures enacted by the Al Dunlap with the help of Coopers and Lybrand presents a strong evidence of “bump up” practice, geared towards increasing the firm’s income to show improved performance.
  1. Senior Management Change: By firing existing seniors and appointing his loyalists, this allowed Mr. Al Dunlap retain operational authority over the firm, giving rise to manipulation of financials as there were no institutionalized structure for “checks and balances”
  1. Aggressive growth plan:  In a bid to meet the three-year growth plans, Mr. Al Dunlap manipulated income statement by increasing “bill and hold” sales of the firms. By transferring ownership rights to retailers and giving them a credit line, he fraudulently increased the accounts receivables for this period, hence shoring up earnings.

2. Focus on the allegations made by Barron's about Sunbeam's accounting. Do you find any red flags that may support these allegations by looking at the "as reported" financials of Sunbeam?

Looking at the “as reported” financials, the following red flags are evident:

  • The revenue realized from sales of assets from discontinued operations was not shown on the 1997 income statement
  •  “Other liabilities” balance went down by 19% while SG&A reduced by 38% indicating that some accrual reversals took place or the impact was from discontinued operations.

Further assessment needs to be carried out to validate other allegations (e.g. extensive use of “bill and hold”, PPE and doubtful account manipulation) made by Barron as this cannot be deduced from the financial statement provided in the case. A breakdown of the balance on each of these accounts will be required.

 3. Compare the "as reported" and "restated" financials of Sunbeam. Do you see any evidence supporting the allegations in the differences between these statements?



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