Question

How did pressures for financial performance contribute to Sunbeam’s culture, where quarterly sales were manipulated to influence investors? To what extent do you believe the Andersen auditors should have considered the resulting culture in planning and executing its audit?

Answer 1

Ans:

Pressures for financial performance contribute to Sunbeam’s culture where quarterly sales were manipulated to influence investors as follows:-

The coercive power wielded by AL Dunlap, high performance expectations from the market and the board of directors of Sunbeam probably all contributed to a cultural mindset that allowed stakeholders to push the limits of the GAAP and ignore good business practices and the needs of other vital stakeholders.

The cronies that Dunlap brought with him to Sunbeam would be well experienced in the techniques and processes to implement Dunlap’s vision and were able to implement them quickly.

The board of directors at Sunbeam hired Dunlap for a reason. They knew his track record, real or inflated, and gambled that Dunlap would be able to apply his four rules of business and turn Sunbeam around.

The new risk taking culture at Sunbeam was also aided by Arthur Anderson’s buy-off of their financials. The market respond positively to Dunlap’s lay-offs, consolidations, re-branding and inflated number and this would have kept the “mean business” wheels rolling.

Andersen auditors should have considered the resulting culture in planning and executing its audit:-

Andersen should have known of Dunlap’s reputation on Wall Street and his promise of a fast turnaround at Sunbeam. Shareholders may have loved Dunlap, but employees despised him. A fearful culture at Sunbeam grew as employees feared pink slips and intimidation from top management.

Dunlap created a culture in which employees would do anything to meet the number goals Dunlap established for the company.

Andersen should have used COSO’s Integrate Framework to evaluate the control environment, the management philosophy and operating style under Dunlap. If this had been done so, Andersen should have been more skeptical and on guard for unusual accounting treatments or transactions.