The management tried to draw attention away from their fraudulent financial reporting by making three major acquisitions in 1998 which were financed partly by stock and by issuance of a company bond. They issued false and misleading financial reports to the lenders. Similar information was presented in the company’s 10-K report for the first quarter of 1998. They also provided misleading information on the company’s outlook to the press and business community. By then, the stock had peaked at $53 up from $12 when Dunlap took over.
The first quarter results did not hit the targets the company had issued to the Wall Street. The management gave assurances that the second quarter performance would hit the target. (Intal, Tiina and Linh Thuy Do, 2002) Poor performance in the second quarter led to media reports on the financial misrepresentation in Sunbeam’s results. The stocks plummeted to lows below the trading price when Dunlap took over as the investors tried to dispose their investments. The board fired him and Kersh immediately and the financial results were restated from the last quarter of the 1996 financial year.
The Sunbeam scandal led to a huge monetary loss for the investors. They lost an aggregate of $3. 4 billion while the company did not recover from the mess and subsequently filed for bankruptcy. The scandal also harmed investor’s confidence in the capital market. The investors had hoped for a turn around but were instead fleeced. (Byrne, John A, 1998) The fraud-triangle model explains tendencies to commit fraud on presence of three factors namely opportunity, incentives or pressure and rationalization.
All these factors were present in the Sunbeam financial statements fraud. The incentive for the Sunbeam management to commit financial fraud came from investors’ pressure for results. Dunlop was hired by the loss making corporation due to his previous record at Scott Paper Company and other companies. His job was clear-cut, he was to restructure the company and set it on a recovery track ready for sale. He was to bolster confidence in the company so that its stocks appreciate. He and his team had to ensure continued growth of the company income and market value.
To achieve this growth and keep investors pleased, the Dunlap’s team set ambitious targets and forecasts that they could hardly achieve in the conventional way. They pursued growth at all costs in order to save their jobs. This incentive was compounded by Dunlap’s bloated ego and insatiable appetite for publicity. He loved the title ‘Chainsaw Al’ and all the publicity that came with it. He wanted to prove himself in the eyes of the investors, business community and the media and set himself very high benchmarks. He even wrote books on just how to turn around or downsize a struggling company.
He went about his restructuring program ruthlessly, firing employees at will and closing plants and headquarters without proper research. (Intal, Tiina and Linh Thuy Do, 2002) Another incentive was presented by investors over emphasis on short term results over an all round revival of the company. The investors were short-sighted in their demands and expectations and they just cheered on as the company purportedly returned to profitability. They did not take time to digest the quality of the results provided and only later did they realize that the short term growth was at the expense of the corporation’s future.