WEEK 2 SECTION
1. How does the nonmarket environment differ from the market environment?
2. What are the implications of these differences for corporate strategies?
3. In which industries is the nonmarket environment likely to be most important? Why?
[7'] ARTHUR ANDERSON AUDITOR [ETHICS] EXAMPLES #1. SUNBEAM.
16. Al Dunlop and Sunbeam, which also used AA.
17. Dunlop recounts his chainsaw techniques: he went from 26 factories to 8, sold all the businesses that do not make sense, cut $225M in costs.
17. But he was also using accounting tricks to make performance look good, with AA's approval.
18. Details on how this was done: took a bigger financial writeoff than he needed to restructure Sunbeam. This meant that (a) it made things looked dismal before he arrived, and (b) it provided a "slush fund" to make it look as though he was generating new profits.
19. He had other tricks as well: eg, booking sales of summer products that were only paper transactions.
19. These accounting tricks are OK if they are disclosed, but by not disclosing how this was being done, Dunlop committed a fraud.
20. This was exposed and Dunlop was fired. Sunbeam's share price dropped precipitously and it declared bankruptcy. It went from $50 to only $10 today.
20. What Sunbeam has in common with Enron: various parties did not do their job. Auditors... External lawyers... BODs....
21. Details on AA senior auditor [Philip Harlow]. He was charged with fraud by the SEC: knowingly or recklessly made false and misleading statements.
21. He is fighting the charges. His lawyers would not let him talk.
21. AA documents were destroyed when an SEC investigation took place. Harlow got orders from AA to get rid of certain work documents, and two boxes of evidence were destroyed.
21. Harlow said this was a mistake and no charges were filed. AA kept him on as managing partner in his Florida office.
22. Wall St investment manager [Jim Chanos] on conflicts of interest: companies pay their auditors, they often pay the bond rating agencies, analysts have investment banking business to support, etc.
23. Investor advocate [Sara Tadler] puts things even more starkly: it is like a 5th grade class that gets to hire their own teacher. Of course they are going to get all "A's".
23. BW editor [John Byrne] on how the SEC is outgunned.
23. Private litigation has been the only thing that has worked: AA settled one lawsuit for $110M... Al Dunlop has had to pay $15M out of his own pocket to settle three different suits.
VIDEO DISCUSSION NOTES --
Sunbeam: Overall Details [from "Bigger than Enron"]
1. How Al Dunlop got his nickname ("Chainsaw Al"): He reduced the company from 26 factories to 8 and cut $225M in costs through mammoth layoffs.
2. Dunlop used a variety of accounting tricks to make Sunbeam's performance look good. For example:
He took a bigger financial writeoff than he needed to restructure Sunbeam. This meant that
a. It made things looked dismal before he arrived.
b. It provided a "slush fund" to make it look as though he was generating new profits.
He booked sales of summer products that were only paper transactions.
3. Key fact: These accounting tricks may be OK if they are disclosed, but not disclosing them is committing a fraud.
4. The consequences once the fraud was exposed:
For Sunbeam: Dunlop was fired, Sunbeam's share price dropped precipitously and it declared bankruptcy.
For Arthur Andersen: AA's senior auditor was charged with fraud by the SEC for knowingly or recklessly making false and misleading statements. AA has paid hundreds of millions of dollars to settle investor lawsuits.
VIDEO DISCUSSION NOTES --
Sunbeam: Broader Issues [from "Bigger than Enron"]
1. What Sunbeam has in common with Enron: various external stakeholders did not do their job in constraining Sunbeam's management.
Auditors from Arthur Andersen.
External lawyers.
Sunbeam's board of directors.
2. These cases point to a broader problem: conflicts of interest involving various stakeholders:
Wall St investment manager [Jim Chanos] on conflicts of interest: companies pay their auditors, they often pay the bond rating agencies, analysts have investment banking business to support, etc.
Investor advocate [Sara Tadler] compares this to a 5th grade class that gets to hire its own teacher. Of course they are going to get all "A's".
3. The role of other political and legal forces in disciplining Sunbeam and Arthur Andersen:
The SEC, as financial regulator, is "outgunned."
Private litigation has been the only thing that has worked:
AA settled one lawsuit for $110M.
Al Dunlop has had to pay $15M out of his own pocket to settle three different suits.