Case 3.4 Sunbeam: Incentive and Pressures to Commit Fraud

Case 3.4
Sunbeam: Incentives and Pressure to Commit Fraud

1. Consult paragraph 9 of PCAOB Auditing Standard No. 5. Based on your understanding of inherent risk assessment and the case information. Identify three specific factors about Sunbeam that might cause you to elevate inherent risk.

The fact that the structure of the organization was in major flux and that the employees were probably in chaos mode with all the terminations in management, I am sure that the overall tone from the top was not a good one. I would assume that employees felt that fraud would be accepted if it meant the bottom line numbers were impressive so this would definitely cause me to elevate the inherent risk level. Especially since replacement employees were given strong monetary incentives to have stock prices raise.

There is also rapid change happening in the entity. Not only was there a huge turnover of staff but there was also the elimination of 87% of products. Headquarters were even closed and consolidated into one. On top of all of that there were huge sales projections along with the introduction of new products. This rapid change should set up a red flag for any auditor and cause them to continue to raise the inherent risk level.

All of these changes and projections caused the stock prices to rise. Since it was known that top management had a personal stake in these stock prices this would also cause an alarm to go off. Especially as it was stated before employees were encouraged to do what they could to cause the value of Sunbeam stock value to go up. Any auditor would have to also assess the inherent risk that would be present in the over emphasis of raising stock