Sunbeam Case Essay

1. Analyze the changes that Al Dunlap had initiated at Sunbeam after being hired from a strategic perspective. Did the changes start by Dunlap allow him opportunities to manage earnings?
Mr. Dunlap fired the current senior executives of Sunbeam and replaced them with managers that he worked with in Scott Paper turnaround. This created an opportunity for him to work with the people of his choice and assured that any illegal activity that he engages in would not be reported by the senior management. Appointing his close friends in MIS and purchasing enabled him to manipulate the inventory of the company.
Through adopting a restructuring plan Mr. Dunlap was able to reshape the company by managing earnings. When the company recorded large sums of restructuring charges it created reserves to be used for future expenditures that would relate to the restructuring plans. However, the Company inflated the restructuring charges. The improper reserves were later used to show higher profit margins by painting a picture that shows the success of the restructuring plan. Mr. Dunlap was hired to turn around the company, he used the “big bath” accounting to depress the current situation so that he would be perceived success in the upcoming fiscal year. As a part of the restructuring plan Mr. Dunlap was planning to cut costs by a large amount. By aggressive cost cutting Mr. Dunlap was able to cut the costs for the next year that actually destroyed value. Mr Dunlap was planning to cut costs by almost 50% and increase the revenue by a substantial amount in such short period in a sector that does not have very high growth rates. This would most likely to indicate that Mr. Dunlap had to do something “extraordinary” to achieve such mission. The extraordinary miracle that was created was built through a “Buy and Hold“ tactic. Sunbeam was selling more barbeques more than ever. The products were sold and shipped to the customers, however the products were shipped out of the grill factory to a third-party warehouse leased by Sunbeam. The company holds the inventory in this location until the consumers who bought actually requested them.
Since Mr. Dunlap owned a lot of options as a part of his compensation plan, it was in his and the senior management team’s advantage to create volatility in the earnings of the company. He exactly did that by first increasing the costs in 1996 and driving the shares upwards in 1997 by posting huge success and when the company missed the earnings in 1998 he announced that the company needed another restructuring that he was planning to implement through large acquisitions.
2. Focus on the allegations made by Barron's about Sunbeam's accounting. Do you find any red flags that may support these allegations by looking at the "as reported" Financials of Sunbeam? The first red flagged that was mentioned by the Barron’s report was the biggest amount of written- off inventory. The Company wrote-off the inventory as a part of the restructuring program and booked the sales afterwards, inflating the profits of the fiscal year. As a part of the restructuring program the Company wrote-off substantial amounts of PPE in 1996, this resulted with lower depreciation expense which boosted the profits. The Company capitalized advertising expense which reduced the SG&A expenses that boosted the profits. The Company reduced the allowance for doubtful accounts in 1997 that substantially increased the accounts receivable for the period by 29% that inflated the profits. The Company increased the inventories in 1997, this was a way for the company to defer the fixed costs of production to a future date, and through this the company increased their profits.
The Company would book the sales of certain products where the buyers had the option of paying lower prices at a later date. However the sales of those products got booked for the current fiscal year (1997). This increased the accounts payable of the company, the company was

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