The Sunbeam Case Casts a Long Shadow

The SEC is readying more than a score of fraud prosecutions against corporate clients of the Big Five accounting firms

When the Securities & Exchange Commission charged former Sunbeam Corp. Chief Executive Officer Albert J. Dunlap and four other former executives with accounting fraud on May 15, accountants and their allies were quick to whisper, "What took so long?" Sunbeam's accounting problems came to light nearly three years ago, when Sunbeam's board fired "Chainsaw Al" and wrote down its reported profits for 1996, 1997, and 1998 by more than $90 million.

Soon, though, the accountants may be wishing the agency would drag its heels. The SEC Enforcement Div. is readying dozens of cases charging financial fraud for settlement or litigation involving clients of the Big Five firms, BusinessWeek has learned. While the agency is mum on which companies it's investigating, a rash of major earnings restatements provides a list of likely targets. And in every case, the SEC will probe the role of audit firms in failing to detect clients' pumped-up numbers -- in some cases charging individual auditors and the accounting firms.


  The Sunbeam charges are "further evidence we aren't blowing smoke," says Richard H. Walker, SEC director of enforcement. "It's large, sophisticated companies that are playing the numbers game. Cases are going to just keep rolling out."

That could be especially bad news for Sunbeam's auditors, Andersen. The firm recently settled a $110 million shareholder suit over its Sunbeam audits. As part of its May 15 action, the SEC sued Phillip E. Harlow, the Andersen partner who oversaw Sunbeam's audits, but didn't charge the firm itself.

Andersen also signed off on the books for Waste Management Inc., which restated its earnings by $3.5 billion in 1997 after new management uncovered a five-year string of profit-boosting bookkeeping tricks. The bombshell cost shareholders $25.8 billion in lost market value, the biggest loss among 32 companies whose restatements were tracked by the SEC. The securities cops have made Waste Management a top case and are looking into the volume of consulting Andersen did for the company while conducting its audits. Andersen says it supports Harlow in the Sunbeam case, but won't comment on any other matters pending before the SEC.


  The securities cops dismiss charges that they're playing political games with accounting cases. They've used the three years since Sunbeam's board fired Dunlap to develop evidence against the key executives that is strong enough to take to court, the regulators insist.

Most SEC actions end in negotiated settlements -- indeed, Sunbeam and its former general counsel, David C. Fannin, settled some charges with the agency on May 15. But the SEC was determined to impose harsh penalties upon Dunlap, his team, and auditor Harlow. Says an agency official: "If that means litigating when you might otherwise settle, so be it."

Dunlap and former Sunbeam Chief Financial Officer Russell A. Kersh denounced the SEC charges as "totally false." A statement by Harlow's attorney says he'll "vigorously contest" the charges.

By Mike McNamee and Christopher H. Schmitt in Washington, with Louis Lavelle in New York

Edited by Douglas Harbrecht

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