In May 2001 the Securities and Exchange Commission sued the former top executives at Sunbeam , charging the company with financial reporting fraud that allegedly cost investors billions in losses.
In the mid-1990s, Sunbeam needed help: its profits had declined significantly as did its stock price, and in 1996, the company reported a loss from continuing operations of 198 million. To the rescue comes Albert Dunlap, also known as "Chainsaw AL", based on his reputation as a ruthless executive known for his ability to restructure and turn around troubled companies, largely by eliminating jobs.
The strategy appeared to work. In 1997, Sunbeam's revenue had risen by 18% and profits were back in the black with income from continuing operations of 123 million. However, in April 1998, Paine Webber Inc. downgraded Sunbeam's stock recommendation. Why the downgrade? Paine Webber had noticed unusually high A/R, massive increase in sales of electric blankets in the third quarter 1997, which usually sell best in the fourth quarter, as well as unusually high sales of barbecue grills for the fourth quarter. Soon after Sunbeam announced a first quarter loss of 44.6 million, and Sunbeam's stock price fell 25%.
It eventually came to light that Dunlap and Sunbeam had been using a "bill and hold" stragtegy with retail buyers. This involved selling products at large discounts to retailers before they normally would buy and then holding the products in third-party warehouses, with delivery at a later date. According to an article in Barron's, much of the variation in Sunbeam's income from 1996 to 1997 reflected a discretionary use of accruals to accelerate expenses to 1996.
Bad debt expense, and the corresponding allowance for uncollectible accounts, is one of several so-called discretionary accruals that directly impact a company's income. Other discretionary accruals include warranty expenses, disscretionary compensation expenses such as bonuses, sales returns, and resturcturing costs. Each of these accrual requires estimates of future events, thus providing management the opportunity to shift income among reporting periods. For example, if management overestimates bad debt expense one period, a company will report lower profit that period and higher profit in a later period.
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