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Sunbeam Corporation Scandal

How does Ethical scandals happen?

One of the earliest scandals that happened was at Sunbeam in the early 2000s. The SEC alleged in its charges against Sunbeam that top management engaged in a scheme to fraudulently misrepresent Sunbeam’s operating results in connection with a proposed “turnaround” of the company. Sunbeam hired a guy named Al Dunlap, a turnaround specialist who had gained the nickname “Chainsaw Al” for this reputation of cutting companies to the bone.  He promised a rapid turnaround and the fraudulent actions helped raise the market price to a high of $52 in 1997. At year-end 1997, at least 62 million of Sunbeam’s reported income of $189 million came from accounting fraud.

First of all, how can a company hire someone with the nickname Chainsaw? A man with a reputation of “cutting employees to the bone” seems like a risky hire to begin with. The accounting world are always going to have people and/or companies that will behave unethically to get a quick buck.

How did Sunbeam inflate earnings so quickly? Earnings Management.

Earnings Management (multiple definitions): 

Purposeful intervention in the external reporting process, with the intent of obtaining some private gain

when managers use judgement in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders abut the underlying economic performance of the company, or to influence contractual outcomes that depend on reported accounting numbers

reasonable and legal management decision making and reporting intended to achieve stable and predictable financial results

These definitions provide a link between earnings management and Rest’s Model of how ethical decisions take place. Rest identifies ethical intent as an essential ingredient in making moral decisions. it is the first step that can lead to executing ethical decisions. Absent ethical intent, a decision maker may be motivated to skew earnings in their favor or that of the company. [1]

Examples of Earnings Management techniques used by Sunbeam:

Cookie-Jar Reserves: these were created to inflate income. These fraudulent revenue transactions were designed to create the impression that Sunbeam was expecting significant revenue growth, which mislead investors and financial markets.

Channel Stuffing: Sunbeam’s 1997 revenue growth was partly achieved at the expense of future results. The company had offered discounts and other inducements to customers to sell merchandise immediately that otherwise would have been sold in later periods, which is called channel stuffing. 

Bill-and-hold: Sunbeam tried to convince retailers to buy grills nearly six months before they were needed, in exchange for major discounts. Retailers agreed to purchase merchandise that they would not receive physically until six months after billing. In the meantime, the goods were shipped to a third-party warehouse and held there until the customers requested them.

After discussing how Sunbeam managed to use these earnings management to achieve false results for their “turnaround”, it is clear that companies would take matters into their own hands to gain whatever they desire. Using financial strategies in a negative way can cause a company to end up bankrupting and ceasing to exist. That is what Dunlap did. Sunbeam lost a lot of money and most of their employees lost their jobs. The overall effect of these scandals cost a company billions of dollars and individuals their careers. That is not okay to the individuals involved. Granted, they knew exactly what they were getting themselves into. Nonetheless, this unethical behavior warranted this type of consequence. 

This sheds light on how companies operate in the accounting world. I cannot fathom the risk of using illegal activities to gain revenue because once someone catches on and realizes something fishy is going on, the heat will come and the truth will come to light. The consequences are too dire and significant to engage in unethical behavior. I know that most individuals are looking at the companies overall future, but doing it illegally is not the answer and would only harm the company and the employees in the long run. 

[1] Mintz, Steven & Morris, R.E. Ethical Obligations for Decision Making in Accounting: Text and Cases. Mcgraw-Hill Education, 2017.

[2] To learn more about this sunbeam case: https://danielsethics.mgt.unm.edu/pdf/sunbeam-case-study.pdf

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Honesty is the Best Policy!

Ever since I was a little kid, my parents have been straight forward with me. They never wanted me to enter the real world with the wrong mindset. Their intentions were to get me to always tell the truth and live with integrity. Honesty is a characteristic that an individual possesses. Being able to tell the truth, no matter the situation requires maturity and having the respect for all parties involved. However, not everyone has this characteristic. People LIE. 

What makes us lie?

One thing I learned from reading the Mintz textbook is that lying is situational. When an individual is put into a situation that causes them to overthink or consider different outcomes, their judgements are clouded from their fear of getting into trouble. This is called Situation Ethics, a term coined by Joseph Fletcher. Situation Ethics is a body of ethical thought that takes normative principles-like the virtues, natural law, university of action, and generalizes them so that an agent can “make sense” out of one’s experience when confronting ethical dilemmas. For situationists, the circumstances surrounding an ethical dilemma can and should influence an agent’s decision-making process and may alter an agent’s decision when warranted. [1]

Does Situation Ethics Justify Cheating?

Having academic integrity means doing the right thing, even though no one is looking. It means upholding the academic honesty policies set forth by all colleges and universities. [2] 

When students are struggling with school, whether it be because they also have full time jobs or because they do not study hard enough, cheating becomes an option. Whatever the reason for their struggles, the possibility of cheating or having academic dishonesty, increases because the FEAR of failing a class or failing an exam gives them the motivation to take a shortcut. This motivation that is driven by fear persuades or “justifies” a student’s decision to cheat. A student can commit academic dishonesty in many different ways. For example, a student can copy another student’s homework, plagiarize an essay, copying another student’s exam, or even turning in an assignment that isn’t theirs. Does having this “fear” justify cheating? 

I personally think cheating is wrong and students should avoid cheating at all costs. I understand taking an easy way out can create temporary satisfaction and completeness, but the long term effect does no good. Imagine cheating on an exam because you came unprepared. Why didn’t the student study more? Did they actually study a lot but still couldn’t comprehend the material? Cheating is always going to be wrong and will always leave a sour taste in your mouth. The guilt will continue to grow if the cheating continues. Why pay to go to college when you are not putting in the effort? 

All in all, being honest with yourself and having the integrity to obey by the academic laws shows that an individual has good character and good judgement. They care about who they are at the end of the day. Lying is wrong. Cheating is wrong. Don’t do it anymore.

[1] Mintz, Steven & Morris, R.E. Ethical Obligations for Decision Making in Accounting: Text and Cases. Mcgraw-Hill Education, 2017. 

[2] Academic Honesty. “Academic Honesty.” Houston Texas Bauer College of Business, 2018, www.bauer.uh.edu/current/academic-honesty.php.

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WE are the FUTURE.

Over the course of time, there have been many occurrences of unethical behavior that got companies and certain individuals in serious trouble. I can name a few; Enron with Arthur Anderson, Swissair with PricewaterhouseCoopers, and so forth. These horrific events changed the lives of many, more importantly the employees and clients. 

As college students begin their journey into the accounting world after school, it is our responsibility to learn the correct way to behave in this industry. We owe it to ourselves and our decision to choose Accounting as our career to always make the correct choice and to lead by example. 

There have been too many situations where power and money motivated certain individuals to act unethically, which destroyed their lives and many others. It does not matter whose interest comes first or who will the right decision affect more. [1]

As future accountants, it is our sworn responsibility to act in the manner that requires us to abide the laws of the California Board of Accountancy. “As professionals, certified public accountant perform an essential role in society. Consistent with that role, members of CalCPA (California Society of Certified Public Accountants) have responsibilities to all those who use their professional services. Members also have a continuing responsibility to cooperate with each other to improve the art of accounting, maintain the public’s confidence and carry out the profession’s special responsibilities for self-governance.” [2] It is our time to start behaving ethically and responsibly because companies and individuals need to adhere by the laws that shape our profession. 

Our profession is highly respected by our society and clients out their financials in our hands and put their sole trust in us to do our job. We MUST do our jobs correctly and carefully. We must not take the easy way out or become complacent. It is time to show the world what we are capable of. As future CPAs, I wish us all the best and good luck in the future.

[1] Green, Brian. “Is Power Evil? The Ethics of Power.” TheMoralMindfield, 20 Jan. 2012, moralmindfield.wordpress.com/2011/02/25/is-power-evil-the-ethics-of-power/.

[2] CalCPA. “Code of Professional Conduct.” CalCPA, 2010, www.calcpa.org/who-we-are/calcpa-factsheet/code-of-professional-conduct.

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Welcome to my blog!

Hello there! My name is Erick and it seems that you stumbled upon my beautiful blog. Fair warning, my blog is intentionally made for my own thoughts and things that I think of during the day. My reasoning for this blog is to basically transfer the ideas and thoughts from my brain to the keyboard. Nothing feels better than typing away at the computer without having to worry about errors and what others think. Now that you have gotten this far, please feel free to continue reading along, as I begin to talk about myself and who I am. :)

Hello again, my name is Erick Mac. I am currently a college senior, attending California State University, Sacramento. I am a Business Administration major, concentrating in Accounting. Speaking of Accounting, this blog is sort of my thoughts and opinion on anything that deals with Accounting. It could be positive or negative. Most importantly, ethical issues that arise from the world of business. It is extremely interesting learning about the different cases and fraudulent activities that occur in the world of accounting. 

Thank you for taking the time to read my first blog entry and I hope you genuinely enjoyed the content. I will be posting daily about any and everything that deals with accounting that I like!

Erick