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Case study on Sunbeam

Act 380 Auditing & Assurance Section: 1 Prepared for:

Muin Uddin Ahmed Senior Lecturer, North South University Prepared by: Mohammad Kawmi Ahmed; Id: 1431134030 Kazi S.a Raz Zishan; Id: 1520478631

LETTER OF TRANSMITTAL

September 24, 2020 Muin Uddin Ahmed Lecturer North South University Subject: Submission of Case study on Sunbeam

Dear Sir, We are pleased to submit our report on Sunbeam. Writing this report has been quite beneficial and insightful and we have tried our level best

The report contains brief and informative aspects of cases related to Sunbeams.

We’d also like to thank you for your support by giving us a free rein to explore and the opportunity to pen down our experiences. Yours sincerely, Mohammad Kawmi Ahmed; Id: 1431134030 Kazi S.a Raz Zishan; Id: 1520478631

ACKNOWLEDGMENT We heartily thank our Project in-charge, Muin Uddin Ahmed whose encouragement, guidance and support from the initial to the final level enabled us to develop an understanding of the subject. We are grateful for his contribution towards the execution of our project. Lastly, we offer our regards and blessings to all of those who supported us in any aspect during the completion of the report.

Introduction Sunbeam was formed in 1897 as the Chicago Flexible Shaft Company. The company originally manufactured and sold agricultural tools. By 1910 the company introduced the iron as its first electrical home appliance. Later other appliances such as mixers, toasters and coffeemakers were introduced. Sunbeam came to be known as a recognized designer, manufacturer and marketer of innovative consumer products aimed at improving lifestyle. In 1946, the company changed its name to Sunbeam Corporation. In 1960, Sunbeam acquired Oster which allowed Sunbeam to expand into other home products such as hair dryers and health and beauty appliances. The company later added electric blankets, mattresses, humidifiers, vaporizers and thermostats,

among other innovations. Sunbeam soon became the leading manufacturer of electric appliances. In 1981, Sunbeam was acquired by Allegheny International (AI); and although Sunbeam was AI‟ s most profitable unit, poor management caused Sunbeam to experience major financial difficulties, and the company was eventually forced into bankruptcy in 1988. In 1990, Michael Price, manager of Mutual Shares, corporate turnaround executive Paul Kazarian, and hedge fund manager Michael Steinhardt purchased the bankrupt Sunbeam. Under their leadership, Sunbeam went public as Sunbeam-Oster in 1992. Despite these obstacles, the board at Sunbeam felt that a profitable future was ahead, and they just had to search for someone to lead them in the right direction. Kazarian, who then became CEO, and Price retained 44% ownership in the company. The years following were tumultuous ones for Sunbeam. Executives at Sunbeam grew increasingly agitated at Kazarian‟ s no risk policies. Kazarian was reportedly hesitant to manufacture too much inventory in the event items would not sell making it difficult to fill retailer‟ s orders. More importantly, he was hesitant to invest in the development of new products, processes or facilities. After being hired as the CEO of Sunbeam Corporation Al Dunlap didn’t waste time making major changes to turn around company finances. Known for his reputation of cutting financial expenses and laying off tons of employees Dunlap lived up to his name while at Sunbeam. However, being under pressure to live up to shareholders expectations and increase investors Dunlap Pushed the GAAP a bit too far.

The Accounting Principle Violation Sunbeam had violated the revenue recognition principle. The SEC found that Sunbeam’s bill and hold sales were not requested by its customers and served no business purpose other than to accelerate revenue recognition by Sunbeam. Accordingly, the company had recognized revenue of $29 million from bill and hold sales in 1997. Sunbeam encourages the sales to occur long before the customer actually needed the goods, through offering financial incentives such as discounted pricing to its customers. Sunbeam holds the product until delivery was requested by the customer. Sunbeam’s customers had the right to return the unsold product. Sunbeam was

unable to set an appropriate level of reserves for any returns. Through its new distribution program, the company accelerated the recognition of sales revenue in advance of actual retail demand. . Revenue Recognition Principle Revenue must be both earned and realized before it is recognized. The realization principle requires that the earnings process should be judged complete or virtually complete. The risks and rewards of ownership of merchandise must be transferred to the buyer. Revenue Recognition Criteria for Bill and Hold Sales set by GAAP was that the following must be met for revenue to be recognized in bill and hold transactions: • The risks of ownership must have passed to the buyer. • The buyer must have made a fixed commitment to purchase the goods. • The buyer must request that the transaction be on a bill and hold basis and must have a substantial business purpose for this request. • There must be a fixed schedule for delivery of the goods. • The seller must not have retained any specific performance obligations such that the earning process is not complete. • The ordered goods must be segregated from the seller’s inventory. • The goods must be complete and ready for shipment. In October 1998 Sunbeam announced that the audit committee of its board of directors had determined that the company would need to restate its prior financial statements, as follows: to reduce the 1996 net loss by $20 million (9 percent of reported losses); to reduce 1997 net income by $71 million (65 percent of reported earnings); and to increase 1998 earnings by $10 million (21 percent of reported losses).

The Auditing Violation

Despite knowing the principle violation incurred in Sunbeam, their auditor, Arthur Andersen issued an unqualified opinion on the company’s financial statements for 1996 and 1997. An unqualified opinion is an independent auditor's judgment that a company's financial statements are fairly and appropriately presented, without any identified exceptions, and in compliance with generally accepted accounting principles (GAAP). In January 1999 a lawsuit alleging audit violation was filed in the U.S. District Court for the Southern District of Florida against Sunbeam, Arthur Andersen, and Sunbeam executives. The suit reached the settlement stage in 2001. As part of the settlement, Andersen agreed to pay $110 million. Through the 1996 audit, Andersen partner Phillip Harlow allegedly became aware of several accounting practices that failed to comply with GAAP. In particular, he allegedly knew about Sunbeam’s improper restructuring costs, excessive litigation reserves, and an excessive cooperative advertising figure. Each of these items reduced net income for 1996. Improper Restructuring Costs During the 1996 audit, Harlow allegedly identified $18.7 million in items within Sunbeam’s restructuring reserve that were improperly classified as restructuring costs because they benefited Sunbeam’s future operations. Sunbeam also failed to comply with GAAP on a $12 million reserve recorded for a lawsuit that alleged Sunbeam’s potential obligation to cover a portion of the cleanup costs for a hazardous waste site. Management did not take appropriate steps to determine whether the amount reflected a probable and reasonable estimate of the loss, as required by GAAP. In The 1997 Audit ,the SEC also found that Harlow discovered several items that were not compliant with GAAP during the 1997 audit. These items related to revenue, the restructuring reserves, and inventory, in particular. In several cases he proposed adjustments that management refused to make. Scandal In the first quarter of 1997, Dunlap saw successof the efforts he applied for the company’s turnaround. But by the end ofthe fourth quarter of 1997, Sunbeam’s position had fallen below expectations. Its first-quarter results in 1998 earned a worse-than-expected loss of $44.6 million. CEO and Chair Dunlap was fired in June 1998. In October 1998 Sunbeam announced that the audit committee of its board of directors had determined that the company would need to restate

its prior financial statements, Sunbeam filed for Chapter 11 bankruptcy protection in February 2001. In May 2001 the U.S. Securities and Exchange Commission (SEC) brought charges of fraud against several former Sunbeam officials. At the end of 2002 the company emerged from Chapter 11 and changed its name to American Household.

Recommendation: There were ethical issues that Dunlap’s management team created by adopting a short-run focus on financial performance. The outcome from their short cut to better financial performance teaches many lessons. However, the lesson that can be learned is that a time will come where either the scam and inflation scheme will be exposed that will then ruin public trust in the company or the scheme went on for so long it becomes impossible to inflate the profits. Another unethical action of firing large numbers of employees is not quite an action of high ethical value. Taking these actions brings suffering to many employees and their families. This action takes away from company moral and integrity, it shows that the company did not care about many employees to do a mass lay off. major ethical issue was when Arthur Anderson certified Sunbeam Corporations Account. This raises major red flags because there was in fact false information in the company’s financials, this certification of the audit not only makes Anderson look bad, but it is a horrible characterization of Sunbeam. The lesson learned from this action is to keep honest financials and work with trusted auditors this false Audit cause Sunbeam Corporation their reputation....