Investigations by the SEC found the following:.
- At least $35 million in overstated expenses from 1996-1998.
- $20 million of deeply discounted products sold in a one-time sale without disclosing the discounts on the books.
- Numerous accounts of "channel stuffing" by contingent sales, "early buy incentives", and "bill and hold" practices.
In 1997, Sunbeam's income was overstated by 50%. preceding the SEC investigation, external auditors, Arthur Anderson, found Sunbeam had guaranteed a 5% profit margin to clients on the re-sale inventory. However, Arthur Anderson found the practice "not material" to the audit and in November of 1998, Sunbeam issued restated financial statements for the fourth quarter of 1996, all of 1997, and first quarter of 1998. The stock price declined to $7 and on February 5, 2001, Sunbeam was forced to file Chapter 11. On May 15, 2001, the SEC charged Dunlap, Kersh, controller Robert J. Gluck, vice presidents Donald Uzzi and Lee Griffin, and Phillip Harlow of Arthur Anderson with fraud. Sunbeam's former council, David Fannin also received a similar charge. Dunlap and Kersh had to pay of civil penalty of $500,000 and $200,000 respectively and were barred from serving as an officer or director of any public company. A later class action suit required Dunlap to pay $15,000,000 and Kersh to pay $250,000. .
Major Issues.
Several major factors contributed to the schemes by Dunlap and Kersh at Sunbeam. First, the Board of Directors did not thoroughly investigate Dunlap's past performance. The Board of Directors also failed to properly investigate the reports issued by Arthur Anderson, their external auditors. The Board of Directors lacked internal controls and policies that could accurately monitor the CEO and other executives. The fact that Dunlap was also allowed to serve as Chairman of the Board while serving as the CEO is proof that the Board lacked the proper controls.
