case 4 4 - revised

Management Control Systems

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Group 6 Jenifer Haake April Miner Meredith Pierce Caitlin Skrdla ACCT 831 Case 4.4: Waste Management, Inc. Accounting Fraud and Auditor Legal Liability 1) Three conditions are often present when fraud exists. First, management or employees have an incentive or are under pressure, which provides them a reason to commit the fraud act. Second, circumstances exist – for example, absent or ineffective internal controls or the ability for management to override controls – that provide an opportunity for the fraud to be perpetrated. Third, those involved are able to rationalize the fraud as being consistent with their personal code of ethics. Some individuals possess an attitude, character, or set of ethical values that allows them to knowingly commit a fraudulent act. Using hindsight, identify factors present at Waste Management that are indicative of each of the three fraud conditions: incentives, opportunities, and attitudes. Incentives: a. Financial pressures from changes in the market and industry b. Intense competition (national, regional, local) c. Under cut prices from municipalities that could offer lower prices by using tax revenue d. Pressure to meet earnings expectations e. Stock ownership benefits f. Retirement benefits g. Performance based bonuses h. Maintain growing stock price i. Maintain industry leadership j. Maintain reputation Opportunities:
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a. Able to use a lot of estimates in depreciation of PPE (over 1/2 of assets) b. Accounting firm (Arthur Andersen) thought of Waste Management as a “crown jewel” and would be lenient to keep from losing their account, working together since before 1971 c. Lot of former Andersen employees were working at Waste Management a. CFO and CAOs all former Anderson auditors d. Arthur Anderson hadn’t forced them to change yet e. Arthur Anderson’s action steps- working together to cover up past fraud with new fraud f. Top executives working together in the fraud g. Netting and geography Attitudes: a. If their auditor was approving the accounting treatment of certain items, it must have been correct b. These entries were needed to stay competitive c. keep their jobs and status in community a. Buntrock’s charitable contributions- “pillar of the community” d. Keep shareholders happy and willing to invest more 2) Review Waste Management’s Consolidated Balance Sheet as of December 31, 1996. Identify accounts whose balances were likely based on significant management estimation techniques. Describer the reasons why estimates were required for each of the accounts identified. Accounts Receivable – Waste Management must determine an allowance for bad debt, which requires judgment. This may be difficult to determine based on past experience as the market place is changing. In addition, general economic conditions must be considered in customers’ ability to pay.
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Employee Receivables – This account requires judgment based on the willingness of employees to pay. It is unclear if this payment is handled by direct deposit, or like any other receivable. Waste Management must consider their turnover rate, and the fact that disgruntled employees
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case 4 4 - revised - Group 6 Jenifer Haake April Miner...

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