Detecting fraud in Sunbeam Corporation's 1997 financial statements
The case reveals the methods Sunbeam used to inflate the data in the company financial statements of 1997 fiscal years. The company recorded the net earning of $109 Million for 1997 fiscal year; however, the net earning for 1997 fiscal year was $38 Million. Typically, the company inflated the overall financial statements, which include the balance sheet, income account and statements of cash flow.
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Financial Reporting and Analysis
The objective of this report is to carry out the financial reporting and analysis of Sunbeam Corporation. To carry out the analysis, the paper adjusts Sunbeam's 1997 financial statements to reveal the fraud perpetuated by the company in its 1997 financial statements.
Adjustment of Sunbeam's 1997 Earning
The report adjusts Sunbeam's 1997 Earning before taxes and interests. This includes depreciation expenses, and doubtful accounts. After the issuance of the Sunbeam Consolidated Financial Statement for December 28, 1997 fiscal year, it is revealed that the company generally inflated the financial results of 1997 at the expense of 1996 fiscal year's results. This report reveals that certain revenue was not properly recognized, as there were principally bill and bold transactions.
Moreover, there are certain costs that were not properly accrued and recorded. For example, the principal allowances such as the cooperative advertising, principal allowances for returns, warranty expense, reserves for product liability and other certain costs were not properly included. Thus, Consolidated Financial Statements for December 28, 1997 and December 29, 1996 fiscal year present doubtful financial records as being revealed in Table 1.
Table 1: Adjustments of Sunbeam 1997 Financial Statements
Previously reported December 1997
($Thousand)
Adjustment 1997
Previously reported 1996
Adjustment 1996
Net sales
$1,168,182
$1,073,090
$984,236
$984,236
Cost of goods sold
837,683
830,956
900,573
896,938
Selling, Administrative & General expense
131,056
152,653
214,029
221,655
Restructuring & asset impairment
(benefit) charges
(14,582)
154,869
110,122
Operating earnings (loss)
199,443
104,063
(285,235)
(244,479)
Interest expense
11,381
11,381
13,588
13,588
Other net (income) expense,
(1,218)
12
3,738
3,738
Earnings or (loss) from continuing operations before the income taxes .
189,280
92,670
(302,561)
(261,805)
Income taxes (benefit)
66,152
40,352
(105,890)
(91,625)
Earnings or (loss) from continuing operations
123,128
52,318
(196,671)
(170,180)
Net Loss from discontinued operations,
(13,713)
(14,017)
(31,591)
(38,301)
Net earnings (loss)
109,415
38,301
$ (228,262)
$ (208,481)
Earnings (loss) per share (of the common stock from continuing operations):
Basic
1.45
0.62
(2.37)
(2.05)
Diluted
1.41
0.60
(2.37)
(2.05)
Loss from the discontinued operations:
Basic
(0.16)
(0.17)
(0.38)
(0.46)
Diluted
(0.16)
(0.16)
(0.38)
(0.46)
Net earnings or (loss) per share of common stock:
Basic
1.29
0.45
(2.75)
(2.51)
Diluted
1.25
0.44
(2.75)
(2.51)
b. The changes in the Sunbeam 1997 financial statements necessitate the changes in the company operating cash flow within the same period. Thus, the report utilizes the adjusted numbers to present the 1997 Operating Cash Flow Statements.
Sunbeam New Operating Cash Flow Statements for 1997 ($ Thousands).
Cash Flow Operating Activities
DECEMBER 28, 1997
Adjustment DECEMBER 28, 1997
Net earnings (loss)
$109,415
$38,301
Adjustments in reconciling net earnings or (loss) to net cash that has been provided by (used in) operating activities:
Depreciation & amortization
38,577
39,757
Restructuring, impairment & other
(14,582)
Other non-cash and special charges
Loss on sale of net of taxes and discontinued operations,
13,713
14,017
Deferred income taxes
57,783
38,824
Increase or (decrease) in cash from changes in the working capital:
Receivables, net
(84,576)
(57,843)
Inventories
(100,810)
(140,555)
Account payable
(1,585)
4,261
Restructuring accrual
(43,378)
(31,957)
Prepaid expenses & other current Assets and liabilities
(9,004)
(16,092)
Income taxes payable
52,844
52,052
Payment of other long-term & non-operating liabilities
(14,682)
(1,401)
Other, net
(26,546)
10,288
Net cash provided by operating activities
(8,249)
(6,043)
a. Strategic Analysis
Michael Porter Strategic Analysis focuses on the strategic planning, strong entrepreneurship, firm core competencies and business model. An organization will be able to deliver value to its customer and enhance competitive market advantages by applying its core competencies within the industry. Typically, Porter (2008) argues that brand equity, and customer loyalty are very critical for company to achieve competitive market advantages. In the financial world, strategic analysis is very applicable in mitigating, identifying, reporting and measuring financial risks. Typically, mitigating financial risks is very critical to achieve organization financial goals and assist a company to enhance financial health.
b.
In a financial world, liquidity is very critical for the company to meet its short-term obligations. Organizations could face a financial crisis if they are short of liquidity. This was the case of Sunbeam because the company was short of net cash to meet its short-term obligations. This issue led the company to face the financial crisis. A company needs to have sufficient expendable net assets to support its everyday financial needs. Thus, the strategic analysis is critical for the company to acquire sufficient liquidity. An organization needs to implement financial planning through the composition of resources and contingent financial operations to be able to compete in a competitive market environment.
Thus, a company will need to implement strategic planning and implementation to achieve brand equity, achieve core competencies and achieve a strong entrepreneurship. The strategic financial analysis is a tool to evaluate the financial risks and achieve high profitability. An organization should develop a strategic budget, and resources allocation to enhance financial planning. Budgets and resources allocation need to be integrated in the strategic planning to enhance financial management. The key financial metrics is critical to be integrated in the financial planning to assist an organization to achieve effective financial goals.
List of Reference
Porter, M.E. (2008) The Five Competitive Forces That Shape Strategy, Harvard business Review,
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