1.

Why didnt Sunbeams board of directors catch on to the

manipulations?
Overall, there were several reasons that the board failed to catch on to the manipulations.
First of all, Chainsaw Al was the CEO at Sunbeam while also serving as the chairman of the
board of directors, so he was dominant in both management and the board. Therefore, the
independence was impaired. Chainsaw Al was an inside director, which means decision-making
were tend to be more beneficial to management rather than to shareholders. With Chainsaw Al
being the chairman, he fed the board the information he wanted them to know, and there were no
open discussion in the boarding meetings, so the rest of the board directors blindly believed
every word he said. Plus, the stock price went up drastically after Chainsaw Al took over and
revenue was up, so the board sincerely believed that he was turning the company around.
Sunbeam should really have elected an outside director to be the chairman. Segregation of duty
should be emphasized.
Second, the board did not perform a thorough investigation on Chainsaw Al s
background before hiring him as CEO. There were several years missing on his resume should
rise the red flag for the board to investigate him more before hiring him. The board should
certainly be more vigilant when hiring someone for such important position. Third, the board of
director committee was weak at Sunbeam. Nobody in the board had decent financial background
to understand and read the financial reports and to raise questions about transactions on the
reports. The board blindly believed their external auditor, Arthur Andersen, without conducting
further substantial investigation. No internal auditors presented at the meetings. In addition,
many financial reporting was not fully disclosed to the board. A good board of director needs to
have rightful skill sets in both management and finance.

What governance measures have protected MCI if they had been in place and enforced?
First, setting the tone at the top management is very important. This reflects top
managements leadership in terms of integrity, honesty, and ethical behavior. Upper management
needs to lead by examples. If the management are making ethical decisions that are in the
publics best interest, employees are most likely to follow what their manager do. They also need
to convey clear policies to employees in terms of organizations value and behavior expectation.
Code of ethics and business conduct should be regularly emphasized and enforced by top
management. The company should have a reward program for those who behave with integrity
and punish unethical behavior.
Second, an enhanced internal control system in the company could have prevented this
wrongdoing. A good internal control system includes control environment, risk assessment,
monitoring and reviewing, information and communication, and control activities. Segregation
of duties among employees is critical in the internal control. The activities of internal control
should be both preventive and detective. As group 3 presented, MCI initiated a review of internal
controls to strengthen their internal systems and procedures for capturing and reporting financial
data, and developed a widespread program to correct deficiencies. They also had the Corporate
Monitor program to have independent oversight of management.
Third, mandating fraud and ethics training is essential. It is a good corporate environment
to offer ethics classes so that everyone including top management is reminded about the
importance of ethics to the public. Establishing an Ethics Office, a Confidential Ethics Hotline,
encouraging an Open Door Policy between management and employees, implementing Zero
Tolerance Policy and so on are effective programs that MCI came up with for strong ethics

enforcement. Last, establishing whistleblower programs could help MCI caught this fraud earlier.
Encouraging and rewarding employees to step up for any wrongdoing they discover in the
company. Overall, these governance measures could essentially have protected MCI.