1. Based on the fraud triangle, there are several factors present at Waste Management that are indicative of each of the three fraud conditions.
Incentives: from the case, the SEC staff claimed that the top Waste Management officers’ fraudulent conduct was driven by greed and a desire to retain their corporate positions and status in the business and social communities. Their bonuses, retirement benefits and stock options closely correlate with the performance of the company. If the company meets predetermined earnings targets, those top managements will earn a lot from profit sharing. Furthermore, aside from money, those people can maintain their high social status by constantly using those ill-gotten gains to contribute to charitable affairs, which will give them a lot of respect and power.
Opportunities: during the 1990s, approximately 14 employees who play either key financial or accounting positions are former employees of the company’s long-time auditor, Arthur Andersen. This management structure gave Waste Management a great opportunity to manipulate their financial performance because we can infer that Waste Management maintained a good relationship with its auditor.
Attitudes/Rationalization: it was a time when Waste Management was encountering intense competition. The competition came from various sources in all phase of its waste management and related operations. Although the management of Waste Management noted that the pricing, quality, and reliability of services and the type of equipment utilized are key elements to compete in the industry. Those improvements usually take time to accomplish. In contrast, deferring several expenses and manipulating earnings are shortcuts to improve their financial performance. In addition, the management believes that the future performance will offset the extra earnings they currently adjusted so that nobody will even notice. In other word, the company adopted the wrong way to improve its performance and justify their action by fraudulently believed that meeting the target earning is the most important no matter which approach to use.
2. Based appendix on the AU Section 342, examples of accounting estimates, compared to Waste Management’s Consolidated Balance Sheet, we can find several items were based on management estimations.
Cost+estimated earnings in excess of billings: this amount depends on the outcome of future event thus is uncertain.
Accumulated depreciation of property & equipment: the salvage value of property and equipment are based on management’s own judgment and these amounts will affect depreciation expense. Furthermore, different depreciation methods adopted also result in different amount.
Current portion of LTD: this amount comes from the amount due within the current year of the present value of long-term debt. To calculate the long-term debt, the discount rate is assumed based on the relative risk of the company compared to correspondent US treasury securities. However, the interest rate in the future is uncertain thus the present value of long-term debt is arbitrary.
Unearned revenue: the company cannot sure that their future service will be actually rendered thus is uncertain.
Long-term debt and put options: the present values of financial instruments are always based on future discount rate as mentioned above thus is subjective and uncertain.
3. Accounts involving significant management estimation mean that the balances of these accounts are based on subjective as well as objective factors such as management’s knowledge or experience about past and current events and its assumptions about conditions it expects to exist and course of action it expects to take. If management does not maintain high ethical standard or is simply too careless to make the right estimation, the numbers shown on the financial statement cannot reflect the true value of the company and will...
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