Question

In: Accounting

In May 2001, the Securities and Exchange Commission sued the former top executives at Sunbeam, charging...

In May 2001, the Securities and Exchange Commission sued the former top executives at Sunbeam, charging the group with financial reporting fraud that allegedly cost investors billions in losses. Sunbeam Corporation is a recognized designer, manufacturer, and marketer of household and leisure products, including Coleman, Eastpak, First Alert, Grillmaster, Mixmaster, Mr. Coffee, Oster, Powermate, and Campingaz. In the mid-1990s, Sunbeam needed help: its profits had declined by over 80% percent, and in 1996, its stock price was down over 50% from its high. To the rescue: Albert Dunlap, also known as “Chainsaw Al” based on his reputation as a ruthless executive known for his ability to restructure and turn around troubled companies, largely by eliminating jobs. The strategy appeared to work. In 1997, Sunbeam’s revenues had risen by 18 percent. However, in April 1998, the brokerage firm of Paine Webber downgraded Sunbeam’s stock recommendation. Why the downgrade? Paine Webber had noticed unusually high accounts receivable, massive increases in sales of electric blankets in the third quarter 1997, which usually sell best in the fourth quarter, as well as unusually high sales of barbeque grills for the fourth quarter. Soon after, Sunbeam announced a first quarter loss of $44.6 million, and Sunbeam’s stock price fell 25 percent. It eventually came to light that Dunlap and Sunbeam had been using a “bill-and-hold” strategy with retail buyers. This involved selling products at large discounts to retailers before they normally would buy and then holding the products in third-party warehouses, with delivery at a later date. Many felt Sunbeam had deceived shareholders by artificially inflating earnings and the company’s stock price. A class-action lawsuit followed, alleging that Sunbeam and Dunlap violated federal securities laws, suggesting the motivation to inflate the earnings and stock price was to allow Sunbeam to complete hundreds of millions of dollars of debt financing in order to complete some ongoing mergers. Shareholders alleged damages when Sunbeam’s subsequent earnings decline caused a huge drop in the stock price. Required: How might Sunbeam’s 1997 “bill-and-hold” strategy have contributed to artificially high earnings in 1997? How would the strategy have led to the unusually high accounts receivable Paine Webber noticed? How might Sunbeam’s 1997 “bill-and-hold” strategy have contributed to a 1998 earnings decline? How does earnings management of this type affect earnings quality? In a 5–7 double-spaced, typed paper, provide complete answers to the questions at the end of the case, fully explaining your answer with cited support. In addition, discuss the ethical issues that surround the parties involved and their actions. Please note the expectation: this assignment is a paper, not simple replies to the case questions. The submitted paper should include an introduction, body, conclusion, and references page. APA style and formatting should be applied to citations and references.

Solutions

Expert Solution

Que-1: How might Sunbeam’s 1997 “bill-and-hold” strategy have contributed to artificially high earnings in 1997?

Answer: A bill and hold strategy accelerates the recognition of revenue. In this case, sales that would normally have occurred in 1998 were recorded in 1997. Assuming a positive gross profit on these sales, earnings in 1997 is inflated.

Que-2: How would the strategy have led to the unusually high accounts receivable Paine Webber noticed?

Answer: A customer is not required to pay for goods purchased under this bill and hold strategy until the goods were actually received by him or her. Therefore, this strategy has increased the accounts receivables of the company.

Que-3: How might Sunbeam’s 1997 “bill-and-hold” strategy have contributed to a 1998 earnings decline?

Answer: Sales that would normally have been recorded in 1998 were recorded in 1997. This bill and hold strategy had shifted sales revenue of 1998 to 1997, thus earnings as well.

Que-4: How does earnings management of this type affect earnings quality?

Answer- Earnings quality refers to the ability of reported earnings (income) to predict a company’s future earnings. Sunbeam’s earnings management strategy produced a 1997 earnings figure that was not indicative of the company’s future profit-generating ability.


Related Solutions

What are the cons of the Securities and Exchange commission?
What are the cons of the Securities and Exchange commission?
● Discuss the role of the Securities Exchange Commission (SEC) and the National Association of Securities...
● Discuss the role of the Securities Exchange Commission (SEC) and the National Association of Securities Dealers (NASD) in regulating the securities industry. Also discuss the role that the stock exchanges play in regulation. ● The Securities Investor Protection Corporation (SIPC) plays an interesting role in the securities market; discuss its purpose. ● Discuss the role foreign markets have played in the expansion of U. S. securities firms. Include details. ● Define arbitrage as it applies to the securities markets...
What is the importance of "The Exchange and Securities Commission" (SEC) in the accounting?
What is the importance of "The Exchange and Securities Commission" (SEC) in the accounting?
Describe the involvement of the issuing firm, the underwriter and the Securities and Exchange Commission in...
Describe the involvement of the issuing firm, the underwriter and the Securities and Exchange Commission in the process of an Initial Public Offering. Describe the common commitments of both the underwriter and the shareholder of the issuing firm in the Aftermarket. Describe a Rights Offering. What are the advantages of a Rights Offering over a Seasoned Equity Offering through an Underwriter? What is a Private Equity Investor, and what sort of firms do they tend to take equity stakes in,...
List and Explain Securities and Exchange Commission (SEC) Disclosure Requirements
List and Explain Securities and Exchange Commission (SEC) Disclosure Requirements
List the three financial statements required to be provided to the Securities and Exchange Commission by...
List the three financial statements required to be provided to the Securities and Exchange Commission by all publicly traded companies.
How effective is the U.S. Securities and Exchange Commission as a regulator of the fund raising...
How effective is the U.S. Securities and Exchange Commission as a regulator of the fund raising process by publicly listed corporations? Discuss.
Suppose the U.S. government decided to abolish the Securities and Exchange Commission and Office of the...
Suppose the U.S. government decided to abolish the Securities and Exchange Commission and Office of the Comptroller of the Currency. How would it affect the investment and growth in the economy?
The Securities and Exchange Commission (SEC) is mandated to regulate the financial statements of publically traded...
The Securities and Exchange Commission (SEC) is mandated to regulate the financial statements of publically traded reporting corporations.   Recently, the SEC has renewed their focus on Non-GAAP reporting issues that are impacting the valuation process of regulated companies. In 2003, the SEC issued Reg G which restricted a company’s ability to deviate from compliance with GAAP regulatory pronouncements. Prior to the issuance of REG G, major reporting issues pertaining to ENRON had resulted in the SEC becoming aware of misleading...
The Securities and Exchange Commission (SEC) has the legal authority to regulate the form and content...
The Securities and Exchange Commission (SEC) has the legal authority to regulate the form and content of financial statements. However, the SEC relies on the following organizations for implementation: Financial Accounting Standards Board (FASB). Industry Committees of the American Institute of Certified Public Accountants (AICPA.)Principles and Practices Board of the Healthcare Financial Management Association (HFMA). Should the preparation and presentation of financial accounting data be regulated?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT