Case 6.2

Waste Management

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Waste Management CaseRelevant Technical KnowledgePCAOB QC #20 - Paragraph #3 “A firm has a responsibility to ensure that

its personnel comply with the professional standards applicable to its accounting and auditing practice. A system of quality control is broadly defined as a process to provide the firm with reasonable assurance that its personnel comply with applicable professional standards and the firm's standards of quality.”

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Waste Management CaseRelevant Technical KnowledgePCAOB AS #13 - Paragraph #7 “auditor's responses to the assessed risks

of material misstatement, particularly fraud risks, should involve the application of professional skepticism in gathering and evaluating audit evidence.”

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Waste Management CaseRelevant Technical KnowledgeSARBOX Section 203 the lead audit or coordinating partner and

the reviewing partner must rotate off of the audit every 5 years

SARBOX Section 206 requires a “one year cooling off period”

before an audit firm employee accept a position as CEO, CFO, Controller, or Chief Accounting Officer of a former client

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Waste Management CaseRelevant Technical KnowledgeMatching Principle Costs need to be matched to the

revenues that they helped to generate. A key point is that expenses should not necessarily be recognized when the work is completed or a product is produced. Rather, the costs should be recognized when the costs can be matched to revenue that has been recorded.

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Waste Management CaseRelevant Technical KnowledgePCAOB AS No. 5 – Paragraph 2 “Effective internal control over financial

reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes.”

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Waste Management CaseRelevant Technical KnowledgePCAOB AS No. 15 – Paragraphs 5-6 Sufficiency “is the measure of the quantity

of evidence” needed. This will depend upon the risk of material misstatement and the quality of evidence obtained. The appropriateness of evidence refers to whether the evidence is both relevant and reliable “in providing support for the conclusions on which the auditor's opinion is based.”

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Waste Management CaseRelevant Technical KnowledgeDefinition of an Asset According to GAAP, an asset must provide

an organization with a right to enjoy future benefits (e.g., by providing future cash flows for the organization). The organization must have control of this future benefit and the transaction that allowed this future benefit to exist for the organization must have occurred for an asset to exist.

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Waste Management CaseRelevant Technical KnowledgePCAOB AS No. 13 – Paragraph 6 & 7 “The auditor also should determine whether it is necessary

to make pervasive changes to the nature, timing, or extent of audit procedures to adequately address the assessed risks of material misstatement.”

“Professional skepticism is an attitude that includes a questioning mind and a critical assessment of the appropriateness and sufficiency of audit evidence. The auditor's responses to the assessed risks of material misstatement, particularly fraud risks, should involve the application of professional skepticism in gathering and evaluating audit evidence.”

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Waste Management CaseRelevant Technical KnowledgePCAOB AS No. 15 – Paragraph 10 “The auditor also should determine

whether it is necessary to make pervasive changes to the nature, timing, or extent of audit procedures to adequately address the assessed risks of material misstatement.”

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Waste Management CaseRelevant Technical KnowledgePCAOB AS No. 13 – Paragraph 15 “auditor should perform audit procedures

to specifically address the risk of management override of controls including: a) examining journal entries and other adjustments for evidence of possible material misstatement due to fraud.”

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Waste Management CaseRelevant Technical KnowledgePCAOB AS No. 5 – Paragraph #14 “the auditor should evaluate whether the

company's controls sufficiently address identified risks of material misstatement due to fraud and controls intended to address the risk of management override of other controls.”

Auditors must always be aware of the danger of unusual journal entries.

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Waste Management CaseRelevant Technical KnowledgePCAOB AS #5 – Paragraphs #26-27 highlight the importance for auditors to

understand and evaluate the period-end financial reporting process at a detailed level. Indeed, according to AS #5, “because of its importance to financial reporting and to the auditor's opinions on internal control over financial reporting and the financial statements, the auditor must evaluate the period-end financial reporting process.

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Waste Management CaseRelevant Technical KnowledgePCAOB AS No. 12 – Paragraph #72 “When the auditor has determined that a

significant risk, including a fraud risk, exists, the auditor should evaluate the design of the company's controls that are intended to address fraud risks and other significant risks and determine whether those controls have been implemented.”

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Waste Management CaseRelevant Technical KnowledgePCAOB AS #12 - Paragraph # 65 “The auditor should evaluate whether the

information gathered from the risk assessment procedures indicates that one or more fraud risk factors are present and should be taken into account in identifying and assessing fraud risks. Fraud risk factors are events or conditions that indicate (1) an incentive or pressure to perpetrate fraud, (2) an opportunity to carry out the fraud, or (3) an attitude or rationalization that justifies the fraudulent action. Fraud risk factors do not necessarily indicate the existence of fraud; however, they often are present in circumstances in which fraud exists.”

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Waste Management CaseRelevant Technical KnowledgeSARBOX Section 301 requires that the “audit committee of an

issuer shall be directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by that issuer.”

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Waste Management CaseRelevant Technical KnowledgeSARBOX Section 302 The CEO and CFO must “sign off” on the

correctness of the financial statementsSARBOX Section 305 there must be “equitable relief for securities

crimes committed will be sought to compensate investors.”

SARBOX Title IX dictates that “penalties for white collar crime will

be more severe with increased fines and jail time.”

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Epilogue – Waste Management Arthur Andersen and WMI paid $220

million to settle shareholder suits

WMI restated earnings, which caused a $6 billion decline in the value of the company shares

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Epilogue – Waste Management Top WMI executives were barred from

acting as directors of public companies ranging from a few years to indefinitely

Arthur Andersen partners related to the engagement were barred from auditing public companies ranging from 1 to 5 years

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