Question

What is PAJE? and how did it changed WASTE MANAGEMENT COMPANY'S financial reports.

Answer 1

Answer

PAJE:

PAJEs or Proposed Adjusting Journal Entries refer to the adjustments recommended by the auditors for the client's financial statements to comply with GAAP. These entries are used as a mechanism to correct an account balance that is not recorded in accordance with GAAP.

The decision made by Andersen regarding the PAJEs was inappropriate under the circumstances because the differences would likely have mattered to financial statement users. Andersen partners had a high level of professional training and experience in adhering to professional standards. As a result, it is surprising that they did not require the adjustments to be recorded.

Because of the magnitude of the adjustments, taken together, it probably would not have mattered if the adjustments were based on subjective as compared to objective differences discovered by Andersen. It is important to point out that the PAJE’s resulted in an overstatementof net income by 12 percent. So, regardless of subjective differences or objective differences, the proposed adjustments were material in nature and would have resulted in a change in earnings per share. It is however important to point out that the subjective differences often lead to negotiation between the auditors and the client, where the objective difference typically do not. And, it is during these negotiations where an auditor’s independence is truly put to the test. This is a terrific opportunity to bring up this tension in class and illustrate the difficulties of maintaining an independent and objective mind as an auditor.