AU 240

Topics: Depreciation, Waste collection, Enron Pages: 6 (2166 words) Published: September 29, 2014

ACC 640: Advanced Auditing
Dr. Owhoso

Case 4: Waste Management

Due: 09/23/14


Waste Management, Inc. was an international provider of waste management services. What once started as a family-owned trash collection business in 1894 grew to be a leading company in the 1990s. The company had diversified into several waste-related ventures, including trash pick up for individuals, businesses, and municipalities, as well as recycling, methane gas removal, and portable toilet rental and cleaning. According to the 1996 financial statements, the company was under a tremendous amount of pressure from competing companies. This pressure from competition initiated a series of frauds on behalf of the top-level accountants and management personnel at Waste Management. Top-level employees manipulated transactions and the financial statements to minimize expense recognition. This was accomplished through a variety of ways. These ways include: “Avoided depreciation expenses on their garbage trucks…, assigning arbitrary salvage values to other assets…, failed to record expenses for decreases in the value of landfills as they were filled with waste, refused to record expenses necessary to write off the costs of unsuccessfully and abandoned landfill development projects, established inflated environmental reserves (liabilities)…, improperly capitalized a variety of expenses, and failed to establish sufficient reserves (liabilities) to pay for income taxes and other expenses.” (Beasley, pg. 106) The SEC determined that these fraudulent practices were executed at the executive level. These transactions were manipulated or perpetrated at company headquarters. In order to prevent others from discovering these transactions, leading accountants at Waste Management used schemes such as “netting” and “geography”. (Beasley, pg. 107) In order to net their transactions, leading accountants would offset liabilities with one-time gains on selling or trading assets, which is referred to as netting. With geography, Waste Management accountants would move money in between different line items on the financial statements. This allowed them to craft the financial statements to be what management wanted to see. The auditing firm Arthur Andersen, LLP was aware of these fraudulent accounting practices. Each year, Andersen would suggest a list of changes to be made. Each year, management would disregard these suggestions. Andersen none-the-less signed off on the transactions each year, while helping management devise an action plan for rectifying the situation. Needless to say, the situation was never rectified. Andersen was fined for its failure to stand up to management. Waste Management was fined for its participation in these fraudulent accounting practices.

Required Questions:

Three Conditions of Fraud
There are multiple factors that existed at Waste Management to indicate the potential for the three fraud conditions: incentives, opportunities, and attitudes. While not mentioned in this case brief, Paul Clikeman in Called to Account: Financial Frauds that Shaped the Accounting Profession indicates, “Waste Management’s growth during the 1970s was marred by allegations of price fixing and illegal trade practices. The company paid fines and settled lawsuits for colluding with other trash carries to allocate territories, refrain from soliciting each other’s customers, and submit rigged bids for municipal contracts” (pg. 197). Less than a decade after its incorporation, Waste Management was in hot water for engaging in illegal practices. “The 1980s brought fines and other sanctions for environmental violations.” (Clikeman, pg. 197) After illegal trade issues came environmental issues. The Company was cited on a number of violations. Waste Management showed one again its lack of moral fiber and ethical practices. Its past actions demonstrated clearly that...
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