Waste Management free essay sample

Three conditions are often present when fraud exists; incentives, opportunity, and attitude. All of these conditions can be seen in the fraud at Waste Management. We will write a custom essay sample on Waste Management or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page   Waste Management was under pressure from other companies within the industry that could offer the same services at lower prices to customers. Dean L. Buntrock, founder, chairman, and CEO of Waste Management was the driving force behind the fraud. Buntrock set the earnings targets, fostered a culture of fraudulent accounting, and personally directed certain of the accounting changes to make the targeted earnings. Buntrock presented himself as a pillar of the community, all the while knowingly committing fraud to fund his endeavors. He perceived himself as such an entrepreneur and community servant that ten days before his wrongdoings became public he enriched himself with a tax benefit by donating inflated company stock to his college alma mater to fund a building in his name. Buntrock was not the only one involved in the fraud at Waste Management. Phillip B. Rooney, president and COO, James Koenig, CFO, and four other officers were named in the complaint by the SEC. In addition, the auditing firm Arthur Anderson was alleged to have been aiding Waste Management in their schemes. Every CFO and CAO in Waste Management’s history as a public company had previously worked as an auditor at Anderson. This interesting fact gives some insight into how the company was able to commit their fraudulent activities for so long. REASONS FOR ESTIMATIONS After reviewing Waste Management’s balance sheet it can be seen that many of the account balances were based on significant management estimation techniques. The following is a list of the accounts and reasons why the estimates were required for each account: †¢Accounts Receivable – Accounts receivable were affected because management estimated the allowance for doubtful accounts. †¢Property Equipment – Since the company did not use the correct salvage values and useful lives of property and equipment it also effected the depreciation accounts. †¢Intangibles/Goodwill – Goodwill is affected by the company using estimated values of assets. †¢Accrued Expenses – Managements estimation of expenses affected accrued expenses. ESTIMATIONS – INHERENTLY RISKY Estimations are used by companies to account for future events. Since these events have not occurred yet, there is some level of uncertainty and a lack of information connected with them. These factors increase the inherent risk associated with the accounts that use estimates which also increases the likelihood of material misstatements in the financial statements. AUDITOR RESPONSIBILITIES – MANAGEMENT ESTIMATIONS AU Section 342 of the PCAOB provides guidance to auditors on obtaining and evaluating sufficient appropriate evidential matter to support significant accounting estimates in an audit of financial statements in accordance with generally accepted auditing standards. The auditors objective when evaluating accounting estimates is to obtain sufficient appropriate evidential matter to provide reasonable assurance that: †¢All accounting estimates that could be material to the financial statements have been developed. †¢Those accounting estimates are reasonable in the circumstances. †¢The accounting estimates are presented in conformity with applicable accounting principles and are properly disclosed (PCAOB, 2013). In evaluating reasonableness, the auditor should obtain an understanding of how management developed the estimate. Based on that understanding, the auditor should use one or a combination of the following approaches: †¢Review and test the process used by management to develop the estimate. †¢Develop an independent expectation of the estimate to corroborate the reasonableness of managements estimate. †¢Review subsequent events or transactions occurring prior to the date of the auditors report (PCAOB, 2013). TECHNIQUES There are several techniques that Anderson could have used to assess the reasonableness of the accounting estimates Waste Management used in valuing its estimations of salvage values and useful lives for property and equipment including: †¢Compare the salvage values and useful lives to similar property and equipment used by others in the same industry. †¢Physical examination of the assets to determine if they have been disposed of or are still in use. †¢Review documentation about the assets in questions to determine if the proper useful lives and salvage values are being used. SOX SECTION 206 According to Section 206 of the Sarbanes-Oxley Act of 2002, Conflict of Interest, it shall be unlawful for a registered public accounting firm to perform for an issuer any audit service required by his 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 audit (SEC, 2002). IDENTIFYING ACCOUNTING ERRORS Andersen may have allowed Waste Management to record the identified accounting errors because they wanted to keep their client happy and continue doing business with them. Waste Management was a major client of Andersen and has made a lot of money from the company over the years. This could have led to pressure on the accounting firm to stay on the good side of the company. Another reason could be that since Waste Management was known to employee people who had worked at Andersen the auditor did not want to mess up their chances of landing a job at the company so they went along with what the company was doing. Accounting firms could do several things to ensure that auditors do not succumb to similar pressures on other audit engagements. First they can make sure the auditors that they hire are knowledgeable and practice the regulations that are set in place in the auditing profession. The firms can make it known that they strictly follow the Code of Professional Conduct set forth by the AICPA and if it is violated they will be terminated. Firms could also make it clear that the auditors are there to perform audits of companies and that there main responsibility is to the public to ensure that a company’s financial statements are presented fairly and in accordance with GAAP. The auditor should not be concerned with keeping the company they are auditing happy but doing their job to inform the public.