ACCOUNTING FRAUD.

• Author: Sweeney, Paul

Learning from the Wrongs

Sunbeam Corp. will long be remembered as more than a household name for electric appliances and camping equipment. It will also be notable for more than a decade of mismanagement and dubious experiments in ruthless cost-cutting and wholesale firings.

For years to come, the name "Sunbeam" will bring to mind a company that relied on questionable accounting gimmicks and outright fraud in sacrificing the company's reputation on the altar of enhanced earnings and a jacked-up stock price.

It happened under the direction of disgraced CEO Albert Dunlap -- the notorious, take-no-prisoners West Point graduate and veteran corporate downsizer unaffectionately known as "Chainsaw Al" -- who put company managers under orders to get the stock price up at any cost. One way to do that, as it turned out, was to report robust sales of electric blankets in the summer and barbecue grills in late autumn.

Eventually, earnings woes and Dunlap's bluster prompted his ouster by an aroused board of directors in June 1998. That was followed shortly by the replacement of accounting firm Arthur Andersen and a series of investigations and shareholders lawsuits, most of which are still pending.

Sunbeam joins an ignominious cluster of companies -- Rite Aid, CUC International (now part of Cendant Corp.), Livent, Oxford Health Plans, Phar-Mor, Miniscribe and, most recently, MicroStrategies -- in business's hall of shame. All of these companies have one depressing feature in common: top managers who, whether out of desperation or greed, apparently turned to accounting trickery to manufacture imaginary sales and other revenues and pump up earnings, sometimes over a period of years. Writing in The Wall Street Journal, one pundit recently reckoned that just three recent fraud cases -- Sunbeam, CUC and Oxford -- burned shareholders for an aggregate $34 billion when the troubles surfaced and the stocks plummeted.

Chief financial officers and comptrollers at such companies may be under duress and persistent pressure to look the other way -- though published studies suggest that, regrettably, they are often involved. Outside directors likely have no clue about any shenanigans. But there are plenty of instances where someone aware of the fraud stepped forward. "Most frauds are not found by fraud investigations," says Dan Jackson, president of Jackson and Rhodes, a Dallas-based accounting firm. "It's usually because of a disgruntled employee, a dissatisfied vendor or someone with a conscience."

These days, just the suggestion that a company may have accounting irregularities is enough to drive down its stock price, notes Robert Willens, an accounting analyst at Lehman Brothers. He cites the case of Tyco International, a well-managed company that makes home-security and alarms systems but which was rumored to have accounting problems by the Tice Report, a markets newsletter published by short-seller David Tice. After Tice raised suspicions, the company lost one-third of its value, although the Securities and Exchange Commission later gave it a clean bill of health.

"It doesn't seem to matter whether it's the SEC or some newsletter, everyone seems willing to sell a stock now even if there's just a hint of questionable...