World of US Finance
Al Dunlap was sacked on June 13 1998 by the outside directors and Russell Kersh followed him four days later. Shareholders took action against the company, the management and the auditors in a class action suit. They were awarded a compensation of $140 million, part of which was $110 million paid to the auditors at the time, Arthur Anderson LLP, while former executives Dunlap and Kersh paid $15 and $0. 25 million respectively. The SEC also took legal action against the main perpetrators of the fraud, for flouting federal anti-fraud laws.
They agreed to permanently not flout the laws and permanently never to act as officers or directors of any public company. The settlement also included a civil penalty of $500,000 and $200,000 for Dunlap and Kersh respectively. They paid all the fines out of their private funds. They however did not plead either guilty or not to the charges. The company was also found guilty of violating anti-fraud legislation and issued with a cease and desist order from such action. P. Harlow was stripped the right to practice as an accountant or auditor but with a chance to appeal against the order in three years time from January 27, 2003.
He was accused of not carrying out a thorough and sufficient audit review of Sunbeam Corporation and authorizing an inaccurate audit report for financial years 1996 and 1997. He did not carry out this audit with the deserved professional diligence and did not confirm whether the statements were within GAAPs. He accepted the disciplinary action without entering plea. (Sec. gov, 2003). Robert Gluck, the former CFO was ordered not to violate the anti-fraud laws and not to hold any office as a director or otherwise in a public company.
He was stripped his right to act as an accountant with a right to appeal after five years commencing from January 27, 2003. He also had to pay a $100,000 fine. Donald Uzzi, a former vice-president, was also ordered to desist from violating the antifraud laws or abetting in their violations. He also was obliged to pay a $100,000 civil penalty (sec. gov, 2003). Meanwhile one of the biggest losers in the Sunbeam scandal financier Ronald Perelman opted to sue Morgan Stanley, his financial adviser during his company’s merger with Sunbeam.
In 1998, Perelman exchanged his 82% stake in Coleman for 14 million shares in Sunbeam and cash. Sunbeam raised the cash by issuing a junk bond. When Sunbeam collapsed in 2001, his stake in Sunbeam was rendered useless. He took legal proceedings against Morgan Stanley, an investment bank, for its failure to disclose all material facts during the share deal. The investment bank had to pay the investor an aggregate amount of $1. 45billion in compensation and punitive damages (Chandrasekhar, C. P, 2005) The sunbeam financial statement fraud did not take place in isolation.
Other huge American corporations such as Enron, Waste Management and Cendant had financial scandals leading to bankruptcy. It is in this environment that the Sarbanes-Oxley Act of 2002 was passed to curb such managerial excesses. Of relevance to Sunbeam, the Act emphasized on auditor independence through and auditor rotation, second partner reviews and elimination of conflict of interest. The act also redefined the relationship between external auditor and internal audit mechanisms (www. sarbanes-oxley. com, 2003).
The Sunbeam accounting fraud was an eye opener for investors, regulatory bodies, auditing firms, the media and the general public. Most of these groups cheered on as Dunlap and his team presented the miraculous revival of the corporation without delving into the details presented in the financial statements. They did not look into the real source of the company revenue. Too much investor pressure, lax internal control system and an over ambitious self-promoting management had the effect of encouraging financial fraud.
It became clear that separation of powers should be put in place between the management, the board and audit committee and the external management. Investors should not fully rely on the directors, internal audit and external auditors to safeguard their interest. They should be able to identify key warning signals of financial improprieties. They should put pressure on the board to be more vigilant when running the corporation. Such warning signals that the investors should have noted were accounts receivables growing at a rate much greater than the growth in sales.
The investors could have realized that the company over-recognized sales revenue. They should carry out deeper analysis of a company results before investing. The Wall Street stock analysts gave Dunlap positive reviews which in turn influenced potential investor’s decision to buy into company. They sensationalized the turn around showering praises on Dunlap policies until it finally his financial improprieties were discovered. The analysts did not act diligently to provide accurate stock analysis.
Byrne, John A, 1998. How Al Dunlap Self-Destructed. The Inside Story of What Drove Sunbeam Board to Act. Retrieved on 11/26/07 from http://www. businessweek. com/1998/27/b3585090. htm Chandrasekhar, C. P, 2005. Fraudulent World of US Finance. Retrieved on 11/26/07 from http://www. sec. gov/news/press/2001-49. txt Intal, Tiina and Linh Thuy Do, 2002. Financial Statement Fraud: Recognition of Revenue and Auditors Responsibility of Detecting Financial Statement Fraud. Retrieved on 11/26/07 from