Sunbeam Case
1. Analyze the changes that Al Dunlap had initiated at Sunbeam after being hired from a strategic perspective. Did the changes started by Dunlap allow him opportunities to manage earnings?
First, after Al Dunlap was hired, Dunlap wanted to surround himself with loyal executives, such as Mr. Kersh, and fired the existing senior managers. This strategy make Dunlap easily get consensus for his points. Second, his immediate strategy was to aggressively cut the costs by eliminating excessive staffs, divest unprofitable divisions and consolidate headquarters as well as production facilities.This strategy could result in lower cost, higher profits. Then he turned his strategy to growth and expansion of core business after the downsizing strategy. This strategy focused on growing the core business by product differentiation to diversifying through both concentric and conglomerate acquisitions. Also company announced a huge restructuring charge
There are three opportunities to manage earnings. First, Dunlap took large one time charges. In November 1996 the company announced a huge restructuring charge of $337.6 million. Second, Dunlap could manage income through managing transactions, which is “channel loading”. It transferred products to retailers and retained the physical inventory in its warehouses. Third, Dunlap built a loyal team, which could effectively control the total company.
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?
There are some red flags that support these allegations:
1. Unusual increase in Accounts Receivable in relations to sales increase - relaxing credit or channel loading. In 1997, the receivables increased %38.5 ($82M) to 295.55M. From Barron’s article, the company extensively use of “bill and Hold” sales.
2. Unusual increase in Inventory in relations to sales increase. In 1997, the
First, after Al Dunlap was hired, Dunlap wanted to surround himself with loyal executives, such as Mr. Kersh, and fired the existing senior managers. This strategy make Dunlap easily get consensus for his points. Second, his immediate strategy was to aggressively cut the costs by eliminating excessive staffs, divest unprofitable divisions and consolidate headquarters as well as production facilities.This strategy could result in lower cost, higher profits. Then he turned his strategy to growth and expansion of core business after the downsizing strategy. This strategy focused on growing the core business by product differentiation to diversifying through both concentric and conglomerate acquisitions. Also company announced a huge restructuring charge
There are three opportunities to manage earnings. First, Dunlap took large one time charges. In November 1996 the company announced a huge restructuring charge of $337.6 million. Second, Dunlap could manage income through managing transactions, which is “channel loading”. It transferred products to retailers and retained the physical inventory in its warehouses. Third, Dunlap built a loyal team, which could effectively control the total company.
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?
There are some red flags that support these allegations:
1. Unusual increase in Accounts Receivable in relations to sales increase - relaxing credit or channel loading. In 1997, the receivables increased %38.5 ($82M) to 295.55M. From Barron’s article, the company extensively use of “bill and Hold” sales.
2. Unusual increase in Inventory in relations to sales increase. In 1997, the