Sunbeam Accounting Fraud: A Look at the Before and the After
October 6, 2012 3 Comments
“History does not repeat itself, but it does rhyme.” – Mark Twain
LST is currently taking a look at a few companies that may have material accounting and/or fraud problems. It occurred to LST that in a few of these cases, past may be prelude to future. And so LST took a look at Sunbeam and a few others. Here are a few things that got LST’s attention, in the case of Sunbeam:
- Large discrepancies between reported earnings and cash flow from operating activities (“CFFO”) matter;
- If management’s explanations for differences between earnings and CFFO do not pass the sniff test, there is a problem.
- CFFO less some portion of cash flow from investing activities is a much more reliable measure of true earnings, than reported earnings… this seems true before and after the fraud.
- A 10% overstatement in revenue can revise earnings downward at least 50-60+% , depending on how much operating leverage there exists;
- Income taxes payable on the income statement is as real as earnings is…it’s not.
- Even when there’s no outright cash fraud, the cash & cash equivalent balances may not be accurate.
- Cash flow from financing activities seems the most difficult to game. Perhaps it is the only statement (in non-financial/banking companies) one can somewhat anchor to, and maybe even “trust and verify” rather than “verify only”
- Fraudulent discrepancies between earnings and CFFO,even after a restatement, seem predictive of very material hits against earnings and CFFO in future periods. See Sunbeam’s 1998 numbers to see for yourself.
- And there’s a lot more.
Without further ado, Sunbeam’s 1997 fraudulent vs. restated numbers: