Waste Management Audit Failure

An implicit theme of this case that I want students to recognize is the contrast between the persistent and vigorous efforts of David Sokol to “get to the bottom” of the suspicious items he uncovered in JWP’s accounting records versus what Judge William Conner referred to as the “spinelessness” of JWP’s auditors. The JWP audits were similar to most problem audits in that the auditors encountered numerous red flags and questionable entries in the client’s accounting records but, for whatever reason, apparently failed to thoroughly investigate those items. On the other hand, Sokol refused to be deterred in his investigation of the troubling accounting issues that he discovered. The relationships that existed between members of JWP’s accounting staff and the Ernst & Young audit team apparently influenced the outcome of the JWP audits. Of course, the Sarbanes-Oxley Act of 2002

Although the top level managers benefited in this situation, the shareholders suffered greatly. They lost a total of around $6 billion dollars in the market value of Waste Management’s stock. By the end of the scandal Waste

During the time of the scandal, which broke in mid-2005, PBS&J had 4,000 employees in 75 offices in 24 states (Barnett, 2007). A number of high-profile projects were under construction with FDOT, OOCEA, and TxDOT. The funds from these projects were being brought into the firm at a rapid rate; however, PBS&J contained a flimsy internal controls system which facilitated the embezzlement that eventually took place. The major players of the scandal were located in the firm’s Miami office. They were Scott DeLoach, then chief financial officer (CFO); Maria Garcia, an accounting employee who was in charge of the office’s database and bank reconciliations; and Rosario Licata, a bookkeeper who maintained the firm’s benefits bank account (Eubanks, 2016).

Waste Management (WM) is the America’s largest trash and recycling company in North America. It is a 13-billion dollar business with 45,000 employees and 20 million customers. Larry O’Donnell, the President and Chief Operations Officer (COO) of Waste Management went undercover for 7 days and met different bosses for each job. He is responsible for all the operations in the company. He witnessed their personal stories as well as their personal opinions

The Sarbanes-Oxley Act of 2002 (SOX), also known as the Public Company Accounting Reform and Investor Protection Act and the Auditing Accountability and Responsibility Act, was signed into law on July 30, 2002, by President George W. Bush as a direct response to the corporate financial scandals of Enron, WorldCom, and Tyco International (Arens & Elders, 2006; King & Case, 2014;Rezaee & Crumbley, 2007). Fraudulent financial activities and substantial audit failures like those of Arthur Andersen and Ernst and Young had destroyed public trust and investor confidence in the accounting profession. The debilitating consequences of these perpetrators and their crimes summoned a massive effort by the government and the accounting profession to fight all forms of corruption through regulatory, legal, auditing, and accounting changes.

The word “fraud” was magnified in the business world around the end of 2001 and the beginning of 2002. No one had seen anything like it. Enron, one of the country’s largest energy companies, went bankrupt and took down with it Arthur Andersen, one of the five largest audit and accounting firms in the world. Enron was followed by other accounting scandals such as WorldCom, Tyco, Freddie Mac, and HealthSouth, yet Enron will always be remembered as one of the worst corporate accounting scandals of all time. Enron’s collapse was brought upon by the greed of its corporate hierarchy and how it preyed upon its faithful stockholders and employees who invested so much of their time and money into the company. Enron seemed to portray that the goal of corporate America was to drive up stock prices and get to the peak of the financial mountain by any means necessary. The “Conspiracy of Fools” is a tale of power, crony capitalism, and company greed that lead Enron down the dark road of corporate America.

Between the years 2000 and 2002 there were over a dozen corporate scandals involving unethical corporate governance practices. The allegations ranged from faulty revenue reporting and falsifying financial records, to the shredding and destruction of financial documents (Patsuris, 2002). Most notably, are the cases involving Enron and Arthur Andersen. The allegations of the Enron scandal went public in October 2001. They included, hiding debt and boosting profits to the tune of more than one billion dollars. They were also accused of bribing foreign governments to win contacts and manipulating both the California and Texas power markets (Patsuris, 2002). Following these allegations, Arthur Andersen was investigated for, allegedly,

The company has been the subject to numerous environmental laws and regulations that govern the discharge of waste product and disposal of wastes.

I remember watching a documentary on Enron, my jaw dropped! I could not believe what that corporation did. Thousands of employees were affected. This drew a great amount of attention to accounting and corporate fraud. Because of this new regulations and legislation were enacted to improve accuracy of financial reporting of public companies. Sarbanes-Oxley Act increased their penalties for fraudulent behaviors and increased accountability.

The Sarbanes Oxley Act came to existence after numerous scandals on financial misappropriation and inaccurate accounting records. The nature of scandals made it clear there are possible measure that could be used to prevent future occurrence of financial scandals. And the existence and effectiveness of Sarbanes Oxley has caused

The three directors were charged with charges of deceiving auditors and dishonesty. Wilkie was charged with two offences of dishonesty as a company’s officer and misleading an auditor of the company, Mainprize was also charged with the same three offences and Burroughs was charged with a misleading a company’s auditor offence. The three directors made the auditors and the investors of the company believe that it was adequately reserved. In other words, they made these auditors and investors believe the company had attained an $8.6 million profit whereas it had actually incurred a $ 19.1 million loss.

Arthur Andersen auditors continued signing off with unqualified opinions. Of course, in a long run misstatement or misrepresentation of true financial situation of waste hauler would lead to a company’s inability to pay its debts and go bankrupt. In this case, and, unfortunately, many more others, Arthur Andersen pursued short-term goals of making good profits since Waste Management was one of

Frank, manager of corporate reporting at Amalgamated Forest Products, has threatened to go public with information regarding a falsified report on the effect of effluent controls on the discharge of wastewater from pulp and paper companies, which has angered his boss, Jim McIntosh and the company’s president, Jim Letourneau. Letourneau was to testify before a legislative subcommittee the following week and use the report, “Endangered Species: The Pulp and Paper Industry in the Upper Peninsula”, to give the industry’s perspective on proposed legislation. The section of the report which contained the falsified financial information was prepared by Tina

While Waste Management continued to produce false numbers to the public, Buntrock used company money to make charitable contributions and present himself as a decent, ethical person (Securities and Exchange Commission: 2002). He received large amounts of money while he perpetrated the fraud, and his executive team was incentivized for their role as well.

As the scandals came to light, mistrust of financial reporting in general grew. One article in the Forbes magazine noted that “repeated disclosures about questionable accounting practices have bruised investors’ faith in the reliability of earnings reports, which in turn has sent stock prices tumbling” (Forbes). Imagine trying to carry on a business or invest money if you could not depend on the financial statements to be honestly prepared. Information would have no credibility. There is no doubt that a sound, well-functioning economy depends on accurate and dependable financial reporting. United States regulators and lawmakers were very concerned that the economy would suffer if investors lost confidence in corporate accounting because of unethical financial reporting.