Question

What AICPA Codes of Professional Conduct were violated in the Waste Management scandal of 1998?

Answer 1

The auditors did not follow many of the AICPA Codes of Professional Conduct. The section that was not followed was 1.210.010.14 which falls under the Conceptual Framework for Independence under .14 Familiarity threat. The auditors were faced with a familiarity threat because of their long relationship with Waste Management. This caused the member to be too sympathetic to the client and too accepting of their work. This was apparent because the auditors viewed the client as very important and they were afraid to lose their business. The auditors were also recognized by the SEC as having an extremely close relationship that impaired their judgement when it came to the fraud. In order to have abided by this rule, Arthur Anderson could have rotated auditors that worked on the case or have peer reviews done on the completed audit. This would have more eyes on the financial statements and hopefully it would cause someone to stand up and tell authorities about the fraud being convicted.

Another section of the AICPA that was not followed was Section 1.000.020.05 which falls under Ethical Conflicts. Arthur Anderson’s auditors knew of the unethical choices being made and they did not consult with appropriate people within the firm or organization about this fraud. The member did not consult with anyone about the falsified reports Waste Management was producing nor did they reach out to an appropriate professional body or legal counsel. According to the case it does not appear that any documentation was conduct to record the crime being commit, the actions proposed or any decisions. It all appears that Arthur Anderson’s auditors knew that Waste Management’s financial statements departed from GAAP but they did not do anything about it. If the auditor’s cared about their profession and their reputation then they would have said something which makes them abide to this section.

Section 1.110.020.02 deals with Director Positions and how when a member serves as a director of an entity, the member’s fiduciary responsibilities to the entity may create threats to the member’s compliance. Until 1997 every CFO and CAO in Waste Management’s history at one time worked as an auditor at Arthur Anderson (1). During 1990’s 14 former Anderson employees worked for Waste Management usually in key financial and accounting positions. At one point, an employee (Allgyer) was selected to be the managing partner of the Waste Management audit because he had demonstrated a “devotion to client service” and had a personal style that fit well with the client. Clearly there was a connection between the two companies and with the help of hiring workers at Waste Management that one time worked in upper management at Arthur Anderson. These workers helped guide Waste Management into techniques that would not allow the auditors to see when compiling their financial statements. It is not a crime to work for a client that you once audited but there was already a present ethical conflict with having a close relationship that was viewed by the SEC. To abide by this section of the AICPA Code of Professional Conduct, the company should have been more selective in their hiring practices and chosen not to hire employees that worked for both companies.  

Section 1.130.010.01 relates to Knowing Misrepresentations in the Preparation of Financial Statements or Records. This relates to the case because the auditor’s audited and issued financial statements and gave them unqualified reports knowing that the reports were falsified. Waste Management strayed away from GAAP and knew that they were misrepresenting the numbers in their financial statements. The auditor’s at one time brought to the client’s attention Proposed Adjusting Journal Entries but management did not make the corrections, they said that they would make the corrections to their accounting techniques in the future. The auditor’s should have told their management about the falsified accounting records which hopefully would have put more pressure on Waste Management to correct their statements.

Arthur Anderson’s auditors did not abide to section 1.320.030.01 which relates to Departures from Generally Accepting Accounting Principles. This section was not followed when it came to this case with Waste Management and Arthur Anderson’s auditors. This section states that GAAP would have the effect of rendering financial statements misleading. Arthur Anderson’s auditors on the case knew that Waste Management’s accounting techniques deferred from GAAP and they mentioned it to their client. When the client did not listen to the auditors, the auditors should have spoken up which they did not do. The auditors should have spoken up and put more pressure on the client to fix their reports but that was not the case. Arthur Anderson’s auditors should have done more for this fraud because it is against their Professional Code to issue unqualified reports when they know there are departures from GAAP.