Case Prepared by
Dr. Sarah Stanwick, Auburn University, School of Accountancy
Dr. Peter Stanwick, Auburn University, Department of Management
No part of this case may be reproduced without the consent of the authors.
The authors gratefully acknowledge the receipt of a 2002-2003 Daniel F. Breeden Endowment for Faculty Enhancement Grant.
Albert "Chainsaw Al" Dunlap took over the reins at Sunbeam Corporation in July 1996 in a hire meant to provide the company with a turnaround in the small appliance industry. His plan involved massive cuts to the company's product lines, plant closings and major cutbacks in the number of employees at Sunbeam. He called for the same types of cutbacks at previous companies he headed, including Scott Paper. On December 23, 1997, the New York Times reported that Since Dunlap took over at Sunbeam, in the previous year one half of the company's 12,000 jobs had been eliminated, approximately 90% of the products produced had been discontinued, and 18 of the 26 plants had been closed (New York Times, December 23, 1997).
Highlights from Albert Dunlap's Career
(Source: New York Times, December 23, 1997)
o Shortly after taking over, he replaced most of the senior management.
o Three months after taking over, he announced 6,000 employee would be laid off.
o In April 1993, he laid off one third of the company's workforce.
o In July 1995, a weakened Scott Paper was sold to Kimberly Clark for around $7 billion.
|Consolidated Press Holdings:
o Began work in 1991 to restructure the company.
o Sold most of the holding company's businesses and revoked company perks
o Hired in 1986.
o Split the natural resources company into two parts. At the part he kept, he laid off approximately 20% of the company's employees and renegotiated labor contracts to cut costs.
In October 1997, Dunlap announced that his turnaround plan for the company
was complete. By June 1998, the company's directors had fired "Chainsaw
Al", commenting that they had "lost confidence" in his leadership
abilities (Los Angeles Times, June 16, 1998). The company announced a first
quarter loss of $45 million in 1998. At the same time, he announced plans to
close eight more plants and fire approximately 6,000 more employees. These changes
followed Dunlap's Four Simple Rules, outlined in his book, "Mean Business":
o Get the right management team.
o Pinch pennies.
o Know what business you're in.
o Get a real strategy.
By March 1998, Dunlap announced that the company planned to buy three additional companies: Coleman, Signature Brands and First Alert. Many suspected that these purchases were meant to disguise losses through writeoffs (www.e-businessethics.com/sunbeam.htm).
Reporting the Problems:
When Dunlap took over Sunbeam in July 1996, the company's stock was trading at $12.50. In March 1998, the stock had risen to a high of around $53. By June 1998, the stock had fallen to around $22 per share (Barron's Online, June 8, 1998). Why the sudden drop? Barron's Online (June 8, 1998) reported several areas related to accounting matters that seem to point to the sudden discovery of a manufactured earnings report:
! In 1996, the company wrote down to zero approximately $90 million of its inventory for product lines that were being discontinued.
! The 1997 year end balance sheet showed a drop from $40.4 million to $23.2 million in prepaid expenses and other assets. As described in the article, the "huge restructuring charge in 1996 made it a lost year anyway, so Sunbeam prepaid everything it could, ranging from advertising and packaging costs to insurance premiums and various inventory expenses." This resulted in reduced costs being expensed for 1997.
! Other Current Liabilities dropped by $18.1 million and Other Long Term Liabilities dropped by $19 million in 1997. This resulted, as the article explains, because reserves for product warranties and other items were drained down in 1997 and creating additional net income for the year. These reserves and other items were created during the 1996 restructuring.
! The company reduced the value of its property, plant, equipment and trademarks by $92 million, the bulk of which was related to ongoing operations. The effect of this devaluation allowed the company to lower its depreciation and amortization expenses in 1997.
! The amount shown for net property, plant and equipment rose in 1997 by approximately $21 million from the year before. The article explains that this was likely the result from costs like product development, new packaging, advertising and marketing initiatives being capitalized instead of expensed in the year they were incurred.
! Allowance for doubtful accounts and cash discounts dropped from $23.4 million in 1996 to $8.4 million in 1997, even though the company showed a rise in sales during 1997.
! Inventory exploded by $93 million during 1997. This may mean that the company was shifting fixed overhead costs to the income statement as part of the value of inventory until the inventory is sold.
! Shifting of revenues from late 1996 into early 1997 may have occurred. According to the article, the company was accused of sending more inventory than ordered to customers or shipping goods after an order had been cancelled. The company said that computer glitches occurred which were responsible for these inventory problems.
After Sunbeam fired Al Dunlap, the Securities and Exchange Commission (SEC)
announced that it would begin investigations into "possible accounting
irregularities" at Sunbeam. Because of all of the problems surrounding
Sunbeam during this time, the company had to delay a bond offering registration
with the SEC because their auditors were withholding the necessary opinion on
the financial statements until the company and the SEC completed their reviews
of the financial statements (The New York Times, June 26, 1998). This announcement
caused the company's share price to plummet to $10.4375. By July 14, 1998, the
SEC had upgraded its investigation of Sunbeam to a formal one (Plain Dealer;
July 14, 1998). The investigation would center around recording the sales of
barbeque grills too early.
The company announced on June 30, 1998 that the financial statements issued for 1997 may require a restatement because of inaccuracies. The company hired Deloitte & Touche to review the work of their outside auditors, Arthur Andersen & Co (Chicago Sun-Times; June 30, 1998). Early in August 1998, the company announced that it would be restating the results of 1997, part of 1998 and possibly 1996 because of improper accounting practices. With this announcement, the share price dropped to $7 per share. This represented an 87% drop since the stock was at a high in March 1998 (Los Angeles Times; August 7, 1998). One analyst said that he forsees "more likely challenges from the lenders and the very real possibility that this company could go Chapter 11" (The Baltimore Sun, August 7, 1998).
Dunlap expressed his outrage with the questioning of the financial statements during his tenure. In an interview on CNN's Moneyline, Dunlap stated, " I'm outraged that people would say somehow I had something to do with the numbers...I have zero reason not to believe them, because that's what the accountants said. That's what the outside auditors said." (Courier Mail; July 10, 1998.)
Bankruptcy or Not?
As the company began to recover from "Chainsaw Al," the new chief executive officer announced that "We have no intention of going bankrupt (The Toronto Star; August 26, 1998). Finally, on October 20, 1998, Sunbeam announced its long awaited restated results. Blame was pointed to Al Dunlap and the improper accounting practices he was alleged to have used during his tenure at Sunbeam. It was found that the 1997 profit, one of the best in Sunbeam's history, was inflated by $95 million because of sales of grills and other products (using bill and hold strategies) and the operating expenses for 1997 were included in a 1996 restructuring charge (St. Louis Post Dispatch; October 21, 1998). The company restated results from the last quarter 1996 through the first quarter 1998. Al Dunlap reiterated his remark that he relied on the company's outside auditors and that the restatement was actually 'technical accounting issues" (The New York Times; October 21, 1998). On December 1, 1998, Sunbeam dismissed Arthur Andersen as its outside auditors and named Deloitte & Touche as its new outside auditors (The New York Times; December 1, 1998).
In February 2001, Sunbeam filed for bankruptcy protection. The company executives said they do not expect any additional plant closings or layoffs. The company was saddled with bank debt around $1.7 billion. Bankruptcy filings reported that Sunbeam had assets of $2.96 billion and liabilities of $3.2 billion (The Baltimore Sun; February 7, 2001). The first prediction of Sunbeam's possible bankruptcy protection came when the company's largest customer, Wal-Mart, said that sales in December 2000 rose just 0.3 percent from the previous years and that in 1999, WalMart accounted for 19 percent of the company's sales (The Baltimore Sun; February 7, 2001). One analyst reported that Dunlap got into a dispute with WalMart that resulted in the company's products receiving less prominent display in WalMart stores (Chicago Sun-Times; February 7, 2001).
By September 2002, Al Dunlap had been banned from ever serving as an officer or director of a public company. He also was required to pay a $500,000 fine, while neither admitting or refuting any of the accounting problems that had occurred during his tenure at Sunbeam (The New York Times; September 5, 2002).
By December 2002, the company announced that it had emerged from Chapter 11 bankruptcy protection. This announcement came with a name change for the company, from Sunbeam Corporation to American Household Inc (The New York Times; December 19, 2002).
Real Lessons Learned from Albert Dunlap's Tenure at Sunbeam:
What lessons can be learned from Dunlap's tenure at Sunbeam? Tom Culley of The Toronto Star pointed out several (July 15, 1998):
1. Any idiot can cut costs.
2. New employees still matter.
3. Old employees still matter.
4. Trust and motivation still matter.
5. Employee know-how still matters.
6. Trade relations still matter.
7. Reliable numbers still matter.
8. Avoid 'management books'.
Questions for Discussion:
1. Who are the primary stakeholders in this case?
2. Read the article, "The Incomplete Resume: A Special Report - An Executive's Missing Years: Papering Over Past Problems." (The New York Times, July 16, 2001). What are the similarities between Sunbeam and Nitec, the paper company for which Albert Dunlap worked in the late 70's?
3. Who has primary responsibility for the financial statements of a publicly held company? How do you know?
Resources to Consult:
1. December 23, 1997; The New York Times; "Sunbeam Dances with Mr. D. - Is Albert Dunlap Saving the Company or Setting a Sale?;" Section D, Page 1, Column 2.
2. June 8, 1998; Barron's Online; "Dangerous Games: Did "Chainsaw Al" Dunlap manufacture Sunbeam's earnings last year"; Jonathan R. Laing.
3. June 16, 1998; Los Angeles Times; " Sunbeam Gives the Ax to CEO 'Chainsaw Al'; Davan Mahabaj; Part A, Page 1.
4. June 26, 1998; The New York Times; "Sunbeam is facing a bleak outlook in the wake of the dismissal of its combative chief executive"; Dana Canedy; Section D, Page 7, Column 5.
5. June 26, 1998; Financial Times (London); "Sunbeam Auditors Withhold Opinion"; Richard Waters; page 28.
6. June 30, 1998; Chicago Sun-Times; "Sunbeam Warns of Financial Review"; Page 4.
7. July 10, 1998; Courier Mail (Queensland, Austrailia); "Outraged Al Takes Chainsaw to Critics"; page 33.
8. July 15, 1998; The Toronto Star; "Chainsaw Al cuts a sorry figure"; Tom Culley; page E12.
9. August 7, 1998; Los Angeles Times; "Sunbeam to Restate Some Financial Results - Earnings: fired Chairman Dunlap and Ally Resign from Beleaguered Appliance Maker's Board"; Part D, Page 3.
10. August 7, 1998; The Baltimore Sun; "Sunbeam readying the real numbers - Shares Fall to $7 - Dunlap being denied $2 million a year"; Page 1C.
11. August 26, 1998; The Toronto Star; "Sunbeam Chief Seeks Growth, Denies Bankruptcy Rumours, New CEO Cancels Dunlap Plan, Spares Plants"; Michael Connor; Page E2.
12. October 21, 1998; The New York Times; "Sunbeam Restates Results, and 'Fix' Shows Significant Warts"; Dana Canedy; Section C, page 6, column 1.
13. October 21, 1998; St. Louis Post-Dispatch; "Restated Sunbeam Earnings Erase '97 Profit"; Page C7.
14. December 1, 1998; The New York Times; "Sunbeam Dismisses Longtime Auditors"; Section C, page 4, column 3.
15. February 7, 2001; Chicago Sun-Times; "Sunbeam Files for Chapter 11 Bankruptcy"; page 68.
16. February 7, 2001; The Baltimore Sun; "Sunbeam Files from Bankruptcy: No Closings, Layoffs Expected during Reorganization"; Page 1C.
17. July, 16, 2001; The New York Times; "The Incomplete Resume: A Special Report - An Executive's Missing Years: Papering Over Past Problems"; Floyd Norris.
18. September 5, 2002; The New York Times; "Former Sunbeam Chief Agrees to Ban and a Fine of $500,000"; Floyd Norris; Section C, page 1, column 2.
19. December 19, 2002; The New York Times; "Sunbeam Emerges from Bankruptcy with a New Name"; Section c, page 4, column 1.
20. Sunbeam and "Chainsaw Al". www.e-businessethics.com/sunbeam.htm.
21. Mean Business: How I Save Bad Companies and Make Good Companies Great. Albert J. Dunlap. 1996. Fireside Books: New York, NY.