Sunbeam ngfjnfjfjhfjfj jhjvgvkugv PDF

Preview

Summary

nothing to do this description hgvbgvhgk hvjkhvkv kvkjhvuh ghk...

Description

Page |1

Letter of Transmittal March 28, 2021

Mr. Muin Uddin Ahmed (AhU) Lecturer, Dept. of Accounting & Finance North South University, Dhaka, Bangladesh

Subject: Submission of Group Project

Dear Sir, With due respect, we'd like to inform you that our semester project has been completed. We worked thoroughly in order to uncover the scandal of Sunbeam Corporation. The report focused on how the whole debacle in the company started and the activities that caused the scandal. When working on this project, we tried our best to give all relevant knowledge and analysis, improving our perspectives, opinions, and connecting them to the actual world of reasonable practice. In terms of any inadvertent mistakes in the report, we expect you to exercise your best judgment. Thank you for your time, guidance, and for providing us with this opportunity to learn.

Sincerely, Mohammad Mesbahuddin Mir Abidur Rahman Farjana Yasmin Fahim Sharear Rahman Tanvir Ahmed Rafi Samia Rahman

Page |2

Acknowledgement First of all, we would like to express our gratitude to the Almighty for enabling us to complete the semester project on “Sunbeam Corporation”. Successful completion of a report requires help from a number of persons. I convey my sincere gratitude to my dedicated faculty Mr. Muin Uddin Ahmed. Without his proper direction and guidance, this project would have been a little success. Thanks to him for this opportunity. For this, we have a team with the right experience and skills to take us to the next level of growth. We continued to build our skills and add appropriate resources throughout this project.

Page |3

Contents Letter of Transmittal .................................................................................................................................. 1 Acknowledgement ....................................................................................................................................... 2 Introduction................................................................................................................................................. 4 Revenue Generating Activities ................................................................................................................. 4 Scandal ......................................................................................................................................................... 5 Accounting Principal Violation ................................................................................................................. 6 Revenue Recognition Principal Violation................................................................................................. 6 In the end of March 1997, Sunbeam improperly recognized revenue: ..................................................... 6 The Company's "Distributor program" and inappropriate reserve. ........................................................... 7 Sunbeam’s improper bill and hold sales ................................................................................................... 7 Sunbeam improperly recognized revenue on a purported sale of parts inventory. ................................... 8 Restructuring Reserve ............................................................................................................................... 9 Auditing Violation..................................................................................................................................... 10 Recommendation....................................................................................................................................... 11

Page |4

Introduction Sunbeam Corporation is a home electronic appliance manufacturing company, with its headquarters situated in Florida, USA. The company was founded back in 1897 by John Stewart and Thomas Clark and was called the Chicago Flexible Shaft Company. The company used to produce horse trimming produce in its early days but during 1910 it started manufacturing the electrical appliances that would make them popular in the future. With the success of their electrical appliances the company rebranded itself and changed their name to Sunbeam in 1946. Following that, later in 1960 the company acquired Oster, one of their rivals in the home appliance business, to have greater hold of the market. Seeing its success in 1981 Allegheny International acquired Sunbeam, but due to the economic difficulties the company faced, it went bankrupt in 1988. In 1990, following the Bankruptcy of Allegheny International, Michael Price, Michael Steinhardt and Paul Kazarian bought the company from its creditors and named the company Sunbeam-Oster. Kazarian took over the CEO position and tried to bring back the company to its former glory. 1992 the company went public but Kazarian was forced out of the company the following year in 1993, to be replaced by Roger Schipke. In 1995 the company renamed again and went with its original Sunbeam name. But that did not help as the company was struggling with business and its revenues and earnings started to fall significantly. Which in the end resulted in the resignation of Roger Schipke in 1996 and later being replaced by Albert J. Dunlap. Known as the turnaround specialist. But his tenure at sunbeam was not the greatest as he was also fired in 1998 due to the heavy loss the company incurred that year’s first quarter. Later the company filled for chapter 11 bankruptcy protection in 2001.

Revenue Generating Activities Sunbeam’s primary revenue generating activity was the selling of their 5 major product lines, which included: 1. Household Appliances 2. Health Care Products 3. Personal Care 4. Outdoor cooking products 5. Away from home

Page |5

Of all these the household appliances and outdoor cooking products contributed to the majority of the sales being 58% of their total sales. The products in these categories included the likes of rice cookers, coffee maker, toaster, charcoal grills etc. The health care product line comprised of products such as blood pressure monitors, vaporizers etc. They also sold hair clippers, trimmers etc. as part of the personal care line. Lastly the Away from home line up included clippers and other products which were related to the veterinarian trade.

Scandal The scandal for Sunbeam Corporation’s start can be traced to be with the appointment of Albert J. Dunlap. Dunlap was infamous for his aggressive cost-cutting measures and had the nickname of “Chainsaw Al”. Also known for being a turnaround specialist ever since he took the job at Sunbeam he started with his aggressive restructuring process, which included cutting the employee count of the company by half. Apart from that he also sold off or discontinued the subsidiaries of the business, replaced the 6 different regional headquarters across USA with only One in Florida. But this is where the first scandal took place. The company reported the restructuring cost of the company way higher than the original in their books. But that’s not the only one. Dunlap started investing his own money in the company, an approximate of $ 3 million in the company, which meant that he has to make the price of the company’s share increase if he wants to make the profit. But it was not an easy task at hand, resulting in unfair methods to cook the book and present false information in their annual reports which were definitely did not comply with the GAAP’s principle. Financial incentives were attached to the top-level managers to increase the price of the share. it led the employees to overstate the revenue and understate the expenses of the company which increases the inherent risk of the company. There was excessive pressure on the employees to increase the revenue and bringing the operating margin to 20%. CEO had personal interest on the company as he had 3 million invested in the company. The company disposed their several product line such as 39 facilities and 87% of their product line. The product disposal leads an immense pressure on the remaining product line.

Page |6

On the other hand, the when the company’s auditor Phillip Harlow was aware of such incidents in Sunbeam. He knew about the irregularities in the company, failing to comply by the GAAP principles, he warned the company and recommended to change and correct the issues. But the management did not do anything about the matter. And after all these Phillip Harlow issued an unqualified opinion for the company in their audited financial reports for the year, and did not report the issues to SEC. These incidents altogether leadup to the eventual fall of sunbeam. Albert J. Dunlap was fired from the company in 1998 and their prior years financial statements were all restated. And an eventual Chapter 11 Bankruptcy protection filed in 2001 for the company.

Accounting Principal Violation Revenue Recognition Principle Violation Under GAAP, Revenue Recognition Principle says 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 owner of merchandise must be transferred to buyer. The product must have been delivered or services must have been provided to the customer. The amount of the sale needs to the fixed and determinable. And there is reasonable certainly that the asset to be received usually cash in a timely manner.

In the end of March 1997, Sunbeam improperly recognized revenue: At the end of the March 1997, just before the first quarter closed. Sunbeam recognized $1.5 million revenue and contributed $400000 in net income from the sale of barbecue grills to a wholesaler. The agreement with the wholesaler provided that the wholesaler could held the merchandise over the quarter end without accepting any of the risk of ownership and could return all the product if it did not sell it. And the wholesaler in fact returns all of the grills to sunbeam during the third quarter of 1997. In this transaction the wholesaler incurred no expense, GAAP does not permit the recognition of revenue on transaction lacking economic substance. This transaction violets revenue recognition

Page |7

principle. This transaction violets also Statement of Financial Accounting Concepts No. 5, Paragraph 83.

The Company's "Distributor program" and inappropriate reserve. In December 1997, Sunbeam started a “distributor program”. In order to generate extra “sales” Sunbeam offered discounts, favorable payment term, guarantee mark-ups and the right to return or exchange unsold product before year-end. From one distributor, Sunbeam book 2.9 million in revenue from a year-end transaction in which Sunbeam sold goods on a consignment basis. And Sunbeam also agreed to provide the customer solicit business and gave permission to cancel the order if it could not sell products. With another distributer sunbeam booked 4.3 million in revenue for blanket custom package. Sunbeam gave the distributer guaranteed mark-up and agreed to park the merchandise until the retail customer ready to accept delivery. In both cases these “sales” largely without economic substance. Sunbeam could not satisfy GAAP requirement for recognizing revenue on these sales. Sunbeam’s liberal return policies also not compliance with the revenue recognition principle as they recognized sale without having a practice of setting aside an allowance or a reserve against possible returns. And they also violating Statements of Financial Accounting Standards 48 (paragraph 8). Sunbeam had insufficient information to set appropriate reserve for return as they went through a significant change from sunbeams previous approach to marketing and distributing its product.

Sunbeam’s improper bill and hold sales

Sunbeam started to using “bills and hold sales” in the second quarter of 1997 to improve earnings. Sunbeam recognized revenue $29 million from bill and hold sales in 1997. They began to offer the customs financial incentives to placed purchase orders before they needed the goods. So, the goods that Sunbeam would have sold in the later period they sold in the second period. Sunbeam also offered to hold the product until delivery and gave the right to return the unsold product. The SEC set following criteria for revenue to be recognized in bill and hold transaction:

Page |8

• 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. Other relevant factors include: "whether [the seller] has modified its normal billing and credit terms for this buyer" and "the seller's past experiences with and pattern of bill and hold transactions." Sunbeam’s bill and hold’ transaction did not meet above criteria. By offering price, credit, concessions Sunbeam induced customer orders. The buyers didn’t initiate the bill and hold sales. Another thing is buyer purchased the product to obtain the sales promotion rather than the business purpose. And the buyers also did not accept any risk of ownership. These transactions were more like projected orders disguised as “sales”. Sunbeam recognized revenue inappropriately before completion of earning process. Also, the risk and ownership had not transferred to buyers. And sunbeam liberal return policies also not comply with revenue recognition principle.

Sunbeam improperly recognized revenue on a purported sale of parts inventory. At the end of the year 1997, Sunbeam recorded $11 million in revenue and 5$ million in income from a sale of spare parts inventory to EPI printers. The sale price had no practical relationship to any payment and absent agreement between the parties on the value of the

Page |9

inventory. Sunbeam agreed to pay certain fees and guaranteed 5 % profit to EPI printers in the resale of this inventory. These sales did not comply with GAAP requirement because of the profit guarantee and the indeterminate value of the contract.

Restructuring Reserve Sunbeam Corporation's senior management manufactured the appearance of a successful restructuring from the fourth quarter of 1996 to June 1998 in order to inflate its stock price and thereby boost its value as an acquisition target. To this goal, management used a variety of unethical earnings management practices to deceive investors and hide the Company's deteriorating financial state. As part of a year-end 1996 restructuring, top management established $35 million in improper restructuring reserves and other “cookie-jar” reserves, which were reversed into income the following year. Sunbeam's management also engaged in guaranteed sales, inappropriate "bill-and-hold" sales, and other deceptive tactics in 1997. Accounting fraud accounted for at least $62 million of Sunbeam's $189 million declared income at the end of 1997. The Company's reported results of operations were further materially skewed by the unreported or poorly disclosed acceleration of sales through "channel-stuffing," which contributed to the misleading appearance of a successful turnaround. His illegal acts began in late 1996, when he created cookie-jar reserves to increase income in 1997. Sunbeam then engaged in deceptive revenue transactions, inflating the company's $189 million earnings report by at least $60 million in 1997. The transactions were designed to provide the impression that Sunbeam was experiencing tremendous revenue growth, deceiving investors and financial markets even more. At the end of 1996, Sunbeam had incurred a total restructuring charge of $337.6 million. 3 However, management filled this charge with at least $35 million in inappropriate restructuring and other reserves and accruals,4 excessive write-downs, and unnecessarily recognized expenses that substantively distorted the Company's reported results of operations in fiscal year 1996, and would materially misrepresent the Company's disclosed operating results in all quarters of financial year 1997, as these inappropriate restructuring and many other reserves and accruals.

P a g e | 10

The $18.7 million in 1996 restructuring expenditures that management knew or was careless in not knowing were not in compliance with generally accepted accounting rules contributed the most to Sunbeam's incorrect reserves. Sunbeam also established a $12 million lawsuit fund to protect itself against any environmental damage. This reserve number, on the other hand, was not calculated in accordance with GAAP and overestimated Sunbeam's likely liability in the matter by at least $6 million.

Auditing Violation Sunbeam’s auditor, Arthur Andersen and Phillip Harlow, the engagement partner in charge of the Sunbeam audit failed to hold onto the true meaning of due care which is, knowing what is right and doing the right things necessary as they failed to comply with GAAP to prepare the financial report in 1996 and 1997. According to Statement on Auditing Standards No. 82, Due professional care imposes a Responsibility upon each professional within an independent auditor's organization to observe the standards of field work and reporting, however Phillip Harlow allegedly allowed and wanted to reserve Sunbeam’s improper restructuring costs, excessive litigation reserves, and an excessive cooperative advertising figure. In 1996, $18.7 million in items under Sunbeam’s restructuring reserve that was improperly classified as restructuring cost and $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 which failed to comply with GAAP because Management did not take any appropriate steps to verify the actual amount. According to FASB statement #5, an accrual and related expense needs to be recorded if the loss is probable and the amount of the loss is able to be reasonably estimated. By the end of 1997, 16 percent of Sunbeam’s reported income came from items that were found to be not in accordance with GAAP. Not only that the fourth-quarter bill and hold transactions did not satisfy required revenue recognition criteria. Fourth-quarter revenue in 1997 included $11 million from a sale of its spare parts inventory to EPI Printers, due to the profit guarantee and the indeterminate value of the contract, revenue recognition on this transaction did not comply with GAAP.

P a g e | 11

New upper management of Sunbeam’s team were very much interested and tried to prove themselves efficient by making the financial report better during 1997. While doing this, management team manipulate the recorded expenses amount in 1997 which resulted a reduction in expenses and give them a scope to look better.

Recommendation As for the recommendation that we would like to give to for sunbeam is firstly, they should have been more patient in turning around the company’s revenues and income rather than trying to make it happen overnight. This hasty approach resulted in the multiple frauds being committed to improve the company’s stock value. Another problem we noted was that Sunbeam changed their CEO too frequent, which in an itself brought stability issues, therefore sticking with a CEO and giving them the time to work their strategy will be a better call....