Manipulating Accounting Estimates

Case taken from: Auditing Cases, Fifth Edition, 4.4

Authors: Mark S. Beasley, Frank A. Buckless, Steven M. Glover, Douglas F. Prawitt

Date: 09/13/13

Case Requirements:

[1] In addition to typical human greed, the management at Waste Management was also under tremendous pressure to maintain profitability in the face of an increasingly competitive marketplace. The firm, via Mr. Buntrock, also set unrealistic earnings targets that were undoubtedly picked up by Wall Street. This factor would only intensify the inventive to do whatever possible in order to hit the earnings estimate.

As is usually the case, top management had the authority within the firm to record “top-level adjustments.” Furthermore, opportunity to cheat was present given the characteristics of the industry Waste Management occupied. Since a significant portion of the firm’s assets comprised depreciable assets such as vehicles and landfills, management had the opportunity to manipulate the financials via unacceptable estimates of future economic life and value. In this case Waste Management also found a willing audit firm in Arthur Anderson. Waste Management was able to convince partners at Arthur Anderson to literally sign off on a plan to correct the books over time, an appalling example of an auditor losing all semblance of independence by providing ample opportunity for Waste Management to publish fraudulent financial statements.

Mr. Buntrock’s arrogant attitude set a tone from the top that only encouraged the other officers and auditors to assist him with the scheme. Holding himself out as a “pillar of the community” and as the founder of the firm his participation was very likely crucial for the other participants to rationalize their behavior.

[2] A review of the 12/31/96