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AC-543-70: Waste Management
Transcript of AC-543-70: Waste Management
Background Charged the top executive officers of WM with perpetrating a massive financial fraud lasting more than 5 years The Scheme Fines Required payment of over $30 million in total ($30,869,054), comprised of $16.4 million in disgorgement, $10.4 million prejudgment interest, and $4 million in civil penalties The Fall & Rise
of Answers here Questions and Answers #2 Refer to Sections 203 and 206 of SARBOX. How would these sections of the law have impacted the Waste Management audit?
Do you believe that these sections are needed. Controversy Resolution:
Q&A's As an auditor, what type of evidence would allow you to detect whether your client was engaging in behaviors designed to mask fraud (such as basketing, bundling, or netting)? Accounting Controversy:
Q&A's 1956 - Dean Buntrock took over Ace Scavenger. It later merged with other companies
1968 - Buntrock founded Waste Management
1971 - Waste Management went public
1994 - Waste Management was reorganized into four global lines of business: Waste Service, Clean Energy, Clean Water and Environmental Infrastructure engineering, and consulting
1995 - Management changed the amortization periods and wrote off improperly capitalized systems costs by netting them against other gains.
1998 - Waste Management announced that it was restating its financial statements for 1993 to 1996.
SEC brought charges against founder Buntrock and five other top officers on charges of earnings management fraud. History Collection – Waste Management, collection from commercial and industrial. Contracts usually lasted 1-5 years
Transfer – As of 1995, WM operated 151 solid waste transfers. The waste was collected from vehicles and then transferred to disposal facilities
Disposal – As of 1995, WM operated 133 solid waste sanitary landfills, only 103 were actually owned by WM Core Operations Robert E. Allyger – a partner at Arthur Anderson; the audit engagement partner for the audits of the financial statements of WM
Edward G. Maier – a partner at Arthur Andersen; the concurring partner for the audits of the financial statements of WM
Walter Cercavschi – a partner at Arthur Andersen; member of the engagement team for the audits of the financial statements of WM
Robert G. Kutsenda – a partner at Arthur Andersen; Central Region Audit Practice Director; responsible for oversight of "quality and risk management processes" and consulting on "significant auditing, accounting, financial statement presentation and reporting problems endured during an audit" Members of the Audit Committee Dean L. Buntrock
Waste Management’s founder
Chairman of the Board of Director
Chief Executive Officer Top Management and Participants Waste Management Resources Where They Are Today Revenues ($000) Solid Waste Management Questions and Answers #1 Answers here Phillip B. Rooney
Chief Operating Officer
CEO James E. Koenig
Executive Vice President
Chief Financial Officer Thomas C. Hau
Chief Accounting Controller Herbert A. Getz
Senior Vice President
Secretary Bruce D. Tobecksen
Vice President of Finance Topics of Accounting Controversy:
Q&A's Consider the principles, assumptions, and constraints of Generally Accepted Accounting Principles (GAAP). Define the matching principle and explain why it is important to users of financial statements. Topics of Accounting Controversy:
Q&A's Based on the case information provided, describe specifically how Waste Management violated the matching principle. Arthur Andersen Andersen audited WM’s annual financial statements since before WM became a public company in 1971.
Every CFO & CAO in Waste Management had previously worked as an Auditor at Andersen.
During the 1990’s, approximately 14 former Andersen employees worked for WM. Topics of Accounting Controversy:
Q&As Consider the decision by CFO James Keonig and Corporate Controller Thomas Hau to phase in the new GAAP method to capitalize interest expense over 3 years. Do you believe that this decision was in the best interest of the shareholders in the long run. Why or why not Arthur Andersen's Involvement How it started:
Andersen’s issuance of materially false and misleading audit reports on WM financial statement for the period 1993-1996
During those period WM engaged Andersen to audit its financial statements included in its annual report on Form 10K
For each year, Andersen issued an Audit report on WM financial statement in which it stated that the company’s financial statement were presented fairly and that Andersen had conducted its audit of those financial statement in accordance with GAAP and GAAS Dean L. Buntrock - $19,447,670 total
comprised of $10,708,032 in disgorgement,
$6,439,638 of prejudgment interest, and
a $2,300,000 civil penalty; Phillip B. Rooney - $8,692,738 total,
comprised of $4,593,764 in disgorgement,
$2,998,974 of prejudgment interest, and
a $1,100,000 civil penalty A repayment of ill-gotten gains that is imposed on wrong-doers by the courts
Funds received through illegal or unethical business transactions are disgorged, or paid back, with interest to those affected by the action
Disgorgement is a remedial civil action, rather than a punitive civil action
Individuals or companies that violate Securities and Exchange Commission (SEC) regulations are typically required to pay both civil money penalties and disgorgement Disgorgement Prejudgement Interest A rate of interest applied to an award in litigation to compensate for the use of monies between a date before trial
(For example, the date of the alleged harmful event or filing of a complaint and the judgment date) Civil Penalties A financial penalty imposed by a government agency as restitution for wrongdoing
The wrongdoing is typically defined by a codification of legislation, regulations, and decrees
The civil fine is not considered to be a criminal punishment, because it is primarily sought in order to compensate the state for harm done to it, rather than to punish the wrongful conduct
A civil penalty, in itself, will not carry jail time or other legal penalties Hazardous Waste
& Industrial Trash to Energy,
Air Quality Intercompany
Revenue 1993 1994 1995 $4,702,166 $5,117,871 $5,642,587 $661,860 $649,581 $613,883 $1,035,004 $1,140,294 $1,027,430 International Waste
Management $1,142,219 $1,324,567 $1,451,675 $1,411,211 $1,710,862 $1,865,081 ($316,344) ($388,470) ($353,309) $8,636,116 $9,554,705 $10,247,617 Connection to Arthur Andersen James E. Koenig -
Thomas C. Hau -
partner for 30 years
engagement partner of the WM audit
head of AA audit division for WM account
Bruce D. Tobecksen -
audit manager of WM audit and others
Members of WM Audit Committee Thomas C. Hau - $1,578,890 total,
comprised of $641,866 in disgorgement,
$507,024 of prejudgment interest, and
a $430,000 civil penalty Herbert A. Getz - $1,149,756 total,
comprised of $472,500 in disgorgement,
$477,256 of prejudgment interest, and
a $200,000 civil penalty Additionally, Getz agreed to settle a related Rule 102(e) administrative proceeding
by consenting to the entry of an order suspending him from appearing or practicing before the SEC as an attorney for five years James E. Koenig - to pay more than $4 million ($4,156,034) in total,
comprised of $831,500 in disgorgement for Koenig's ill-gotten earnings-based performance bonuses,
together with prejudgment interest thereon in the amount of $1,246,517, and
a civil penalty in the amount of $2,078,017 The SEC's litigation is continuing as to James E. Koenig Waste Management's former chief financial officer and executive vice president (1) Buntrock
(6) Tobecksen Judicial Review Bruce D. Tobecksen – $809,159 in total
Settled about a year before the judgment of Buntrock, Rooney, Hau, Koenig, and Getz
comprised of $403,179 in disgorgement
$285,980 prejudgment interest, and
a $120,000 civil penalty Enjoin them (or prohibit them) from committing future violations of the anti-fraud and other provisions of the federal securities laws Permanently barred from acting as an officer or director of a public company, and Bonus Paid 1992 1994 1995 Total Buntrock Rooney Hau Koenig Getz Tobecksen $550,000 $1,120,000 $1,792,000 $3,462,000 $382,500 $1,029,280 $1,141,000 $2,552,780 $161,500 $250,000 $420,000 $831,500 $72,500 $201,600 $120,000 $394,100 $472,500 $219,000 $ ---- $ ---- $90,000 $129,000 $172,500 $300,000 Buntrock, Rooney, Koenig, Hau, Getz, Tobecksen Koenig, Hau, Tobecksen Koenig, Hau Claims:
Securities Fraud, Filing False Periodic Reports SEC Violations Claim: Falsification of Books and Records Claim: Lying to Auditors Arthur Andersen Two Factors: (1) TWO restatement of financial statements (February 1998 & August 1999)
Two earnings warning (July 1999)
USA Waste Services, Inc. / Waste Management, Inc. (2) Class-action lawsuit (September 1999)
Shareholders filed securities and fraud lawsuits
Later, settled for $457 million to shareholders who purchased company securities and/or sold put options from June 1998 to November 1999
The top executives did not have to pay any money into this settlement Paid $229 million to settle another class-action suit about questionable accounting practices
Paid $20 million to WM as malpractice settlement
Paid a $7 million civil fine to the SEC after they accused AA of "knowingly or recklessly" issuing false and misleading audit reports for Waste Management for the years 1993 though 1996 that inflated the company's earnings by more than $1 billion Three Andersen partners, without admitting or denying wrongdoing:
Settled allegations of federal securities law and anti-fraud provision violations
Agreed to an anti-fraud injunction, a civil penalty and a bar from appearing or practicing in front of the SEC as an accountant, with the possibility of reinstatement A fourth partner, with no admission or denial:
Settled administrative proceedings regarding improper professional conduct and agreed to a bar with the possibility of reinstatement Inside AA: Dean L. Buntrock Phillip B. Rooney Thomas C. Hau James E. Koenig Herbert A. Getz Bruce D. Tobecksen Cumulative Restatements of Pre-Tax Income
(through 12/31/96) Vehicle, equipment and container depreciation expense Capitalized interest Environmental and closure/post-closure liabilities Purchase accounting related to remediation reserves Asset impairment losses Software impairment reversal Other Pre-tax subtotal Restatements of Pre-Tax Income
(1/1/97 through 9/30/97) Income Tax Expense Restatement
(through 9/30/97) Total Restated Items in millions $509 192 173 128 214 (85) 301 $1,432 $250 $190 $1,872 Feb. 2000 - Suing WM for:
Pension worth $14 million
$40 million in compensation claims
$25 million for losses in his WM stock after merger with USA Waste Services, Inc. or because of WM's mismanagement
Unspecified amount for punitive damages Feb. 2002 - Suing SEC for:
Conflict of Interest
Two SEC audit investigators were former WM employees Elected member of Notre Dame's Board of Trustees
Established the Rooney Family Professorship at Notre Dame,
program helps secure accomplished professors
Chairman of Claddagh Investments, LLC,
private investment firm
Chairman of the Board at Accutest Laboratories,
environmental testing laboratory
Member of the Commercial Club of Chicago
an organization that seeks to enhance economic prosperity in the Chicago area
Currently, a Chicago resident December 2008: died at age 73 in Crown Point, IN
Instead of flowers, family requested memorial contributions to Mount Carmel High School in Chicago, IL or St. Jude's Children's Hospital 2011:
Sued by 30,000 former employees and participants of the Waste Management Profit Sharing and Savings Plan and the Waste Management Retirement Savings Plan
Breach his fiduciary duty under ERISA by:
failing to prudently manage the assets of the Plan
failing to provide complete and accurate information
failing to monitor co-fiduciaries
enabling co-fiduciaries to commit violations
not remedying violations 2011:
Sued by 30,000 former employees and participants of the Waste Management Profit Sharing and Savings Plan and the Waste Management Retirement Savings Plan
Same reasons as James E. Koenig October 2011:
Donated $5,000 to Miami mayor Carlos Gimenez's re-election mayoral campaign *Currently, alive but hidden Viable WM For Home For Businesses Curbside Pickup Recycling Services Dumpsters Medical Waste Portable Storage Recycle by Mail Schedule Waste Pickup Recycling Services Dumpsters Medical Waste Construction Services Security Services Portable Storage Recycle by Mail BUY.
Buy the Bagster Bag at Your Local Home Improvement store.
It comes in a compact package, so it's easy to carry and store. Buy as many as you need and fill them up when you're ready. Fill.
Fill your bagster bag with up to 3,300 lb of debris or waste.
You don't have to wait for a dumpster to be delivered or finish your project within a rental time period. Gone.
Schedule your collection online or by phone.
When you're done, simply schedule and pay for a pickup so you can move onto the next task. The average cost is $99 per bag, but varies by area. Green Solution: The Bagster Topics of Accounting Controversy:
Q&A's Consider the principles, assumptions, and constraints of Generally Accepted Accounting Principles (GAAP). What is the specific definition of an asset? Topics of Accounting Controversy:
Answer An asset is anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value. Waste Management Assets Garbage trucks
100 fully operational landfills that the company both owned and operated Topics of Accounting Controversy:
GAAP Standards Depreciation expense is determined by allocating the historical cost of tangible capital assets (less the salvage value) over estimated useful life of the assets
A cost can be capitalized if it provides economic benefits to be used or consumed in future operations
Interest can be capitalized as part of the cost of acquiring assets for the period of time that it takes to put the asset in the condition required for its intended use. GAAP requires that the capitalization if interest must cease once the asset had become substantially ready for its intended use Topics of Accounting Controversy:
Capitalization Capitalized costs related to obtaining the permits so that it could defer recording expenses related to the landfills until they were in use
Did not write off costs related to impaired and abandoned landfill projects and disclose the impact of the write-offs
Only disclosed the RISK of future write-offs
Capitalized systems development costs instead of recording them as expenses when incurred Interest Due to relatively long time required to obtain permits, construct landfills, and prepare to receive waste, WM was able to capitalize interest related to landfill development.
Used Net Book Value (NBV) to avoid GAAP requirement to cease interest capitalization once the asset became sustainably ready for use Depreciation Made numerous unsupported changes to the estimated useful life and/or salvage values of vehicles, containers, or equipment
Reduced the depreciation expense recorded in each period
GAAP (landfills) requires a company compare a landfill’s cost to its anticipated salvage value, with any difference depreciated over its estimated useful life.
Carried almost all of the landfills on the balance sheet at cost Answer According to the matching principle, expenses are recognized when obligations are incurred and offset against recognized revenues, which were generated from those expenses.
The principle is important because it created consistency in the financial statements. Financial statements can be distorted if expenses are recognized too soon and provide an unfair representation of the business.
Recognizing an expense earlier lowers net income
Recognizing an expense later raises net income Topics of Accounting Controversy Geography entries
Moved millions of dollars to different line items on the income statement to make it harder to compare results across time.
One time gains realized on the sale or exchange of assets were used to eliminate unrelated current period operating expenses, as well as accounting misstatements that had accumulated from prior periods. Topics of Accounting Controversy:
Q&A's Consider the practices of basketing and bundling. Briefly explain why each practice is not appropriate under GAAP. Answer Under GAAP, when a project subject to depreciation winds up sooner than expected, the remaining cost must be written off immediately. Topics of Accounting Controversy:
Basketing Management transferred the costs of unsuccessful efforts to obtain permits for certain landfill sites to other landfill sites that did not receive permits or were seeking permits
WM was commingling impaired or abandoned landfill project costs with the cost of a permitted site
Happened when a lose stemmed from the inability to maintain a waste-disposal permit Bundling Transferred unamortized costs from landfill facilities that had closed earlier than expected to other facilities that were still in operation
Happened when another reason led to early closure *Never disclosed either basketing or bundling
Led to overstated profits Top-Side Adjusting Journal Entries Management at end of reporting period used top-side journal entries to “close the gap” before actual earnings and desired goals
Lower level employees in operating division had no involved or idea of management’s use of top-side journal entries
Reduce allowance for doubtful accounts
Extend useful lives of trucks by two years
Double the salvage values of trucks Answer Reported expenses lower than incurred by manipulating the salvage value of assets
Revised the useful life of equipment so depreciation expense is lower
Landfills not properly amortized
Capitalized systems development cost instead of recording them as an expense
Inflated revenues and profits Continuation.... Waste Management’s financial statement were not presented fairly in conformity with GAAP for the year 1993-1996.
The company used improper accounting to increase its operating income.
Andersen was reckless in not knowing the company’s financial statement were not presented fairly. Inside AA:
Who were involved? Six Andersen partners were involved in the issuance of unqualified audit reports on Waste Management’s annual financial statement:
Robert E. Allgyer- the engagement partner
Edward G. Maier- the concurring partner and the risk management partner for the firm’s Chicago’s office
Walter Cercavschi- an audit partner on the engagement
Robert G. Kutsenda- the Audit Director for Andersen’s Central Region
The Managing Partner of the firm
The Audit Division Head Andersen acknowledged that the Company's original financial statements for the periods 1992 through 1996 were materially misstated and that its prior unqualified audit reports on those financial statements should not be relied upon. In the Restatement, the Company admitted that it had overstated its net after tax income as follows: Reports by Arthur Andersen: 12/31/1992 12/31/1993 12/31/1994 12/31/1995 12/31/1996 Year Originally Reported As Restated % Overstated $850,036 $452,776 14.9% 100+% 56.8% 25.0% 77.6% $784,381 $603,899 $192,085 $739,686 $288,707 $627,508 $340,097 $(39,307) AA's Responsibility: The Andersen engagement teams that performed audits of WM’s financial statements in the late 1980s first discovered several of the accounting practices resulting in certain of these misstatements.
From 1993 through 1996, the engagement team had identified and documented numerous accounting issues and had brought those issues to the attention of the Consulted Partners.
Andersen knew or was reckless in not knowing that the audits of the financial statement on which the firm issued unqualified audit reports during those years were not conducted in accordance with GAAS.
*So as a result, Andersen engaged in improper professional conduct within the meaning of Rule 102(e). SEC. 203. AUDIT PARTNER ROTATION.
Section 10A of the Securities Exchange Act of 1934 (15 U.S.C. 78j–1), as amended by this Act, is amended by adding at the end the following:
‘‘(j) AUDIT PARTNER ROTATION.—It shall be unlawful for a registered public accounting firm to provide audit services to an issuer if the lead (or coordinating) audit partner (having primary responsibility for the audit), or the audit partner responsible for reviewing the audit, has performed audit services for that issuer in each of the 5 previous fiscal years of that issuer.’’.
SEC. 206. CONFLICTS OF INTEREST.
Section 10A of the Securities Exchange Act of 1934 (15 U.S.C. 78j–1), as amended by this Act, is amended by adding at the end the following:
‘‘(l) CONFLICTS OF INTEREST.—It shall be unlawful for a registered public accounting firm to perform for an issuer any audit service required by this title, if a chief executive officer, controller, chief financial officer, chief accounting officer, or any person serving in an equivalent position for the issuer, was employed by that registered independent public accounting firm and participated in any capacity in the audit of that issuer during the 1-year period preceding the date of the initiation of the audit.’’. Sarbanes-Oxley Answer These sections would have impacted Arthur Anderson seeing that it had provided audit services to Waste Management in the prior years.
With this section being in effect, it allows the auditor to be unbiased when reviewing the financial statements, especially if it is the first time he/she is working with that particular company.
It also would have impacted Waste Management in such a way that some of the main officials of the company would have not been able to work there.
Several of the top officials worked at Arthur Anderson before they became employed by Waste Management.
* These two sections are needed because the unnecessary damage that was caused by Waste Management will not be able to occur again because the two sections have been implemented. Answer A greater responsibility has been placed on auditor’s assess the risk that fraud might be occurring within the organization.
Auditors must make an assessment of whether any warning or signs are present and, if they are, perform procedures to determine whether fraud may actually be occurring.
To prevent fraud, a company should be aware of all the types of fraud that could take place so it can create appropriate audit programs.
A company should discuss the risk of fraud with all management and staff, use fraud tests and be aware of the managing staff’s ability to override fraud control system. Topics of Accounting Controversy:
Q&As In referring to the second standard of the Generally Accepted Accounting Standards, it states that, "In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors".
"Auditor independence refers to the independence of the external auditor. It is characterized by integrity and an objective approach to the audit process. The concept requires the auditor to carry out his or her work freely and in an objective manner." Topics of Accounting Controversy:
Q&A's Based on your understanding of fraud risk assessment, what three conditions are likely to be present when a fraud occurs (i.e., the fraud triangle)? Based on the information provided in the case, which of these three conditions was most prevalent at Waste Management, and why? Answer Fraud risk assessment (3 key elements):
• Identify inherent fraud risk — Gather information to obtain the population of fraud risks that could apply to the organization. Included in this process is the explicit consideration of all types of fraud schemes and scenarios; incentives, pressures, and opportunities to commit fraud; and IT fraud risks specific to the organization.
• Assess likelihood and significance of inherent fraud risk — Assess the relative likelihood and potential significance of identified fraud risks based on historical information, known fraud schemes, and interviews with staff, including business process owners.
• Respond to reasonably likely and significant inherent and residual fraud risks — decide what the response should be to address the identified risks and perform a cost-benefit analysis of fraud risks over which the organization wants to implement controls or specific fraud detection procedures. *Opportunity was most prevalent out of the three conditions.
Several top-side adjustments
Improper accounting practices:
depreciation and capitalization, artificially inflate earnings, netting, and geography entries
Profited from the fraudulent accounting from:
Bonuses and stock options Most Prevalent Topics of Accounting Controversy:
Q&A's Consult Paragraph 69 of PCAOB Auditing Standard No. 5 and Sections 204 and 301 of SARBOX. What is the role of the audit committee in the financial reporting process? Do you believe that an audit committee can be effective in providing oversight of a management team such as that of Waste Management? Indicators of material weaknesses in internal control over financial reporting include -
Ineffective oversight of the company's external financial reporting and internal control over financial reporting by the company's audit committee PCAOB Audit Standard No. 5, Paragraph 69 SARBOX SEC. 204. AUDITOR REPORTS TO AUDIT COMMITTEES. ‘‘(k) REPORTS TO AUDIT COMMITTEES.—Each registered public accounting firm that performs for any issuer any audit required by this title shall timely report to the audit committee of the issuer—
‘‘(1) all critical accounting policies and practices to be used;
‘‘(2) all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management officials of the issuer, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the registered public accounting firm; and
‘‘(3) other material written communications between the
registered public accounting firm and the management of the
issuer, such as any management letter or schedule of
unadjusted differences.’’. SARBOX SEC. 301. PUBLIC COMPANY AUDIT COMMITTEES. ‘‘(m) STANDARDS RELATING TO AUDIT COMMITTEES.—
‘‘(1) COMMISSION RULES.—
‘‘(A) IN GENERAL.—Effective not later than 270 days after the date of enactment of this subsection, the Commission shall, by rule, direct the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance with the requirements of any portion of paragraphs (2) through (6).
‘‘(B) OPPORTUNITY TO CURE DEFECTS.—The rules of the Commission under subparagraph (A) shall provide for appropriate procedures for an issuer to have an opportunity to cure any defects that would be the basis for a prohibition under subparagraph (A), before the imposition of such prohibition.
‘‘(2) RESPONSIBILITIES RELATING TO REGISTERED PUBLIC
ACCOUNTING FIRMS.—The audit committee of each issuer, in its capacity as a committee of the board of directors, shall be directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by that issuer (including resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work, and each such registered public accounting firm shall report directly to the audit committee.
‘‘(A) IN GENERAL.—Each member of the audit committee of the issuer shall be a member of the board of directors of the issuer, and shall otherwise be independent.
‘‘(B) CRITERIA.—In order to be considered to be independent for purposes of this paragraph, a member of an audit committee of an issuer may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee—
‘‘(i) accept any consulting, advisory, or other compensatory fee from the issuer; or
‘‘(ii) be an affiliated person of the issuer or any subsidiary thereof. *Overall, the audit committee is responsible for ensuring that the financial reporting process is credible, controlled and reliable, and that the company's financial reporting is transparent, consistent and accurate. Effective vs. Ineffective An audit committee could be effective in providing oversight of the management team at WM
could’ve informed WM to take advantage of the SEC opportunity to cure defects rule and help WM comply with all accounting policies and practices
AA proposed a series of action steps in early 1994 to help adjust the improper accounting,
but top management at WM continued to manipulate results in '94, '95, and '96
The major problems:
the audit committee knew about the advice from AA
they were partners of AA and continued to let this improper accounting continue
there weren’t any internal controls and there were no reports of internal controls included in their audit report pre-SARBOX
The other problem:
this is pre-SARBOX = no ramifications, such as jail time, for not following SEC’s rules. Consider the role of the Waste Management employee who was responsible for calculating depreciation expense and recording the proper amount in the financial statements. Assuming the employee knew that the consolidating entries in the fourth quarter recorded by upper management were fraudulent, do you believe that the employee had a responsibility to report the behavior to the audit committee? Why or why not? Topics of Accounting Controversy:
Q&As Answer The WM employee had a responsibility to whistle blow on the fraudulent entries recorded by upper management based on SARBOX – Section 301 #4 Complaints
There should be a procedure in place by the audit committee on how to treat complaints submitted anonymously by employees based on their concerns with questionable accounting or auditing matters
Not speaking up could make the employee responsible in the long run ‘‘(4) COMPLAINTS.—Each audit committee shall establish procedures for—
‘‘(A) the receipt, retention, and treatment of complaints received by the issuer regarding accounting, internal accounting controls, or auditing matters; and
‘‘(B) the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters. SEC. 301. PUBLIC COMPANY AUDIT COMMITTEES. SARBOX Current Status Auditor: Ernst & Young LLP (since 2007)
audit in accordance with PCAOB (US)
Stock Market price:
(As of May 7, 2013) $41.42 Answer The decision was not in the best interest of the shareholders in the long run.
While Waste Management temporarily prospered, many of the shareholders lost money.
Especially when the stock price dropped after Waste Management’s improper accounting was discovered. What is auditor independence, and what is its significance to the audit profession? In what ways was Arthur Anderson’s independence potentially affected on the Waste Management audit, if any? Answer Describe why netting would be effective for Waste Management’s management team why trying to cover up their fraudulent behavior. Answer Netting is the settlement of obligations between two parties that process the combined value of transactions.
It is design to lower the number of transactions required. In order to conceal the understatement of expenses, defendants restored to an undisclosed practice known as “netting”.
They used one-time gains realized on the sale or exchange of assets to eliminate unrelated current period operating expenses and accounting misstatements that had accumulated from prior periods.
Defendants offset one-time gains against items that should have been reported as operating expenses in current or prior periods and thus concealed the impact of their fraudulent accounting and the deteriorating condition of the Company's core operations. MM Topics of Accounting Controversy:
Q&As What is the difference between an information technology general computing control and an automated application control? Answer Information technology general computing control or ITGC are control are controls that apply to all systems components, processes, and data for a given organization or information technology (IT) environment.
The objectives of ITGCs are to ensure the proper development and implementation of applications, as well as the integrity of programs, data files, and computer operations.
Its objective relates to the confidentiality, integrity, and availability of data overall management.
Overall, the ITGC apply to all organization-wide system while automated application are specific to a program or system supporting a particular business process including data edits, separation of business functions, balancing of processing totals, transaction logging, and error reporting.
Therefore the objection of application control is that input data should be accurate, complete and authorized. CT KD KD KD KD KD KD KD KD KD KD KD KD KD KD KD KD MM MM MM MM MM MM MM MM MM MM Topics of Accounting Controversy:
Q&As 29. To identify significant accounts and disclosures and their relevant assertions, the auditor should evaluate the qualitative and quantitative risk factors related to the financial statement line items and disclosures. Risk factors such as size and composition of the account; Susceptibility to misstatement due to errors or fraud; Volume of activity, complexity, and homogeneity of the individual transactions processed through the account or reflected in the disclosure; Existence of related party transactions in the account.
32. The components of a potential significant account or disclosure might be subject to significantly differing risks. If so, different controls might be necessary to adequately address those risks. Answer Types of revenue earned include sales which helped Waste Management to avoid losing even more money.
Koenig and Hau also reduced current period expenses by using an improper method for capitalizing interest on landfill construction costs.
GAAP allows interest to be capitalized as part of the cost of acquiring assets that take time to bring to the condition required for use.
Once the asset becomes substantially ready for its intended use, GAAP requires that interest capitalization cease.
A landfill qualifies for interest capitalization because a relatively long period is required to obtain permits, construct the facility, and prepare it to begin receiving waste.
Waste Management may be subject to inherent risk because Waste Management disclosed only a risk of future write-offs, instead of writing off impaired and abandoned landfill permitting projects and disclosing the impact of such write-offs. MM MM CT CT CT CT CT CT SM CT CT CT CT CT CT CT CT CT CT CT CT CT SM SM SM SM SM SM SM SM SM SM SM SM CT SM SM SM SM SM SM SM SM SM SM SM SM SM SM SM SM SM SM SM SM SM