Sunbeam Company: A Model of Accounting Misconduct, Research Paper Example

Sunbeam Corporation was plagued with accounting difficulties from the late 90s to the early 2000s. Misconduct involved some basic accounting principles. The principles involve the reporting of revenues and reserves (Cherry, 2004). Ultimately, everyone involved seemed to lose out, and the federal government had to step in to approximate some justice (Securities and Exchange Commission (SEC), 2001).

What had happened was that Sunbeam overreported revenues. To finance the acquisition of Coleman, the camping equipment manufacturer, Sunbeam made the fiscal health of the company seem more robust (Cherry, 2004). In essence, it fudged the numbers to get loans to buy Coleman. Basic accounting equations make it so that reserves were exaggerated (Cherry, 2004). This made loaning the company money to buy Coleman more attractive to lenders. Shareholder’s lost most on the deal (Cherry, 2004). The value of Sunbeam stock was falsely high, and the acquisition increased the value of Coleman stock (Cherry, 2004).

Furthermore, Sunbeam had overestimated Coleman’s manufacture rate which made for an extremely unbalanced transaction overall. Sunbeam was barrowing money against collateral that was not worth what they said it was, and they did it to purchase a company that was not worth what they thought it was. Lenders felt left out in the cold and initiated proceedings with the U.S (SEC, 2001) The SEC issued an order demanding Sunbeam declare bankruptcy to balance the outstanding false values and fined CEOs over $141 million while still requiring them to inject enough personal wealth to offset the losses incurred by lenders and shareholders (SEC, 2001).

Sunbeam Corporation had been overwhelmed with accounting difficulties from the late 90s to the early 2000s. Sunbeam’s accounting misconduct involved some basic the reporting of revenues and reserves. This study underscores the need for ethical accounting practices and oversight.

The overall result was about $4.4 billion in loses to shareholders and about 1,700 jobs lost. The judgment was that of a civil action lawsuit which speaks to one of the problems of the system as a whole. To sufficiently understand the problem, we must first investigate the history of generally accepted accounting principles (GAAP).

GAAP as we know them were formulated after World War II. The aim was to reduce cost in the realm of negotiation and financial information publication. At the end of the day, it was meant to improve the bottom line of businesses as a whole. Here is where the limitation comes in, though. Investors and preparers cannot assume the credibility of such statements as exemplified in the Sunbeam fiasco. Despite the good intention of the standardization movement, government has been ineffective in enforcing these practices in a way that is economically meaningful.

Thus, until misconduct is discovered, stakeholders simply incur the risk involved in estimating the accuracy of published financial information. It is this disparity between ethics and law that has meant the loss of untold billions of dollars. What is worse is the imbalance it brings to the global economy. False reporting garners behavior aimed at unrealistic objectives, and when the difference that bridges the assumption with reality collapses, the entire financial infrastructure is threatened whether or not legal proceedings are initiated. Lawsuits themselves consume resources of those already on the ropes because of loses incurred because of dishonest accounting practices. It is at this paradox that GAAP fails most profoundly. Nevertheless, although it is an imperfect system in need of innovations to address such issues, it is better than no system at all.

References

Cherry, A. A. (2004). Sunbeam Corporation Case: “Bill and Hold Sales, Channel Stuffing, and Lots of Returns: The Effects on the Revenue, Inventories, and Receivables”, in Cheryl R. Lehman, Tony Tinker, Barbara Merino, and Marilyn Neimark (ed.) Re-Inventing Realities (Advances in Public Interest Accounting, Volume 10), Emerald Group Publishing Limited: 63-81.

Securities and Exchange Commission. (2001). Accounting and Auditing Enforcement, Release No. 1393. Retrieved from http://www.sec.gov/litigation/admin/33-7976.htm