Sunbeam Case

6. What problems can you identify with Arthur Andersen’s work as auditor of Sunbeam?

a. Excessive compensation to top officers

* 250 out of the 300 top officers were given huge stock options, so significant that if they resigned before the 3-year vesting period, they would forego gains of at least $1 million each

i. This made top officers want to follow whatever regime CEO Al Dunlap created for their own benefit and not disclose misstatements to their auditor Author Anderson; top officers did not seem to question his methods even though they were unethical

b. Extensive undisclosed activity

* “Early-buy incentives” including offering excessive discounts/incentives to induce customers to place orders before they would otherwise do so, which were not disclosed to investors

* $19.6 million of deeply discounted products (a one-time sale) were sold in the first quarter of 1997 without disclosure, conveying a false sense of sale

* Accusations of paper shredding

ii. Trend: did same thing with Enron

c. Overlooked the overstatements made during 1996 in restructuring charges that created inflated reserves to be reversed later, thus bolstering future profits

* $18.7 million of overstated restructuring costs (not in conformity with GAAP)

* $2.1 million overstatement of inventory loss, even though the goods were later sold thus inflating margins

* $2.3 million overstatement of advertising expenses for services to be rendered in 1997

d. Arthur Anderson had become aware of “some” of the revenue recognition being improper, but disregarded them as “immaterial” without further research

* Seemed to be more interested in revenue generation than fiduciary responsibility

e. Deidra DenDanto, former Arthur Anderson auditor and acting internal auditor of Sunbeam, noticed the financial misstatements. She resigned and gave notice of these act to the board, however it didn’t seem to go past that...