Sunbeam committed two fraud schemes when Al Dunlap was the company’s Chief Executive Officer (CEO): (1) Improper Timing of Revenue Recognition via Bill Hold Sales, Consignment Sales, and Other Contingency Sales and (2) Overstating Earnings via Improper Use of Restructuring Reserves. A series of detection methods were utilized in each fraud scheme to determine the indicators that proved that Sunbeam was involved in manipulating its financial data. The most utilized method for detecting Sunbeam’s fraud was Financial Statement Analysis. Utilization of Annual Reports and Disclosures were utilized just as much as Corporate Research and Media while Business Plan Analysis was ranked as being the fourth most used. Finally; leadership qualifications …show more content…
There are two methods to properly analyze financial statements: (1) horizontal and vertical analysis and (2) financial ratio analysis. Sunbeam’s auditors utilized the Percentage of Sales and Gross Margin Percentage ratios to determine the likelihood of overstating sales. By the first quarter of 1998, Sunbeam’s Percentage of Sales increased by 20% when comparing the first quarter of 1997. The significant increase in Percentage of Sales indicated that there was a high probability that sales were overstated from early recognition of bill hold and consignment sales. Therefore, all fictitiously reported sales would remain as debits on the balance sheet while legitimate sales would be credited in Accounts Receivable and debited in Cash. The Gross Margin Percentage enabled auditors to determine the likelihood that Sunbeam experienced a sudden upward or downward fluctuation of sales. Manufacturing companies did not normally experience sudden fluctuations in sales. Therefore, the 14% and 36% decreases between the first two quarters in 1997 and 1998 provided indication that Sunbeam boosted its numbers by decreasing the value of inventory and taking rebates …show more content…
By reviewing the financial statements, auditors were able to find that Sunbeam had been overstating company earnings through utilizing large one-time charges, restructuring reserves, and cookie-jar reserves. Large-one time charges reported on the financial statements result in inflated earnings. For example, Sunbeam reported restructuring charges totaling $154.9 in 1996’s fourth quarter which included over-accruals in advertising and litigation reserves flowed back into the company as earnings. The restructuring reserves were first reported on the financial statements when Al Dunlap started his role as CEO. One might assume that the reserves enabled Sunbeam to recognize future expenses earlier. The opposite would be true as well. Reserves were Sunbeam’s way of inflating earnings, but later decreased the reserves to zero from $63.8 million. The rapid decrease in Sunbeam’s restructuring reserves indicated that they were inflating profits while ignoring accrued expenses. Cookie jar reserves enabled Sunbeam to inflate earnings, but they did not increase cash flow. Instead Sunbeam reported an operating profit as well as a negative cash flow from operations (CFFO). Discovering the fictitious reporting required financial statement analysis to locate the large-one time charges and decreasing reserves that helped inflate company