Question (a)
Three fundamental conditions are generally present when fraudulent financial reporting occurs which are incentive, opportunity and attitude. There are various factors present at WM that are indicative of each of the three fraud conditions.
Firstly, the factors present at WM that are indicative of the incentive or pressure to perpetrate fraud are WM paid large audit fees as well as other related fees to the external auditor AA. This incentive causes AA to treat WM as valuable client and agree to compromise with the company to commit fraud. The other factor is the strong interest of the management in employing inappropriate means to meet predetermined earnings target. Since the company’s revenue was not growing fast enough to meet those targets, the company management fraudulently manipulated the expenses to inflate earnings. Moreover, the company’s financial performance is threatened by a high degree of competition, primarily in pricing and rendering services, from various sources in all phases of its operations which drive them to manipulate the financial reporting.
The second fraud condition is the opportunity to carry out the fraud. Assets and revenues are based on significant estimates that involve subjective judgments and uncertainties that are hard to verify. This gives opportunity for the company to manipulate their accounting methods and estimates in several areas including vehicle and equipment depreciation and landfill cost accounting. The opportunity to commit fraud also exists due to the fact that the CEO and CFO had previously worked as an auditor at AA and some of the accounting personnel were the former AA employees. This situation makes it easy for the fraud to happen.
Last but not least, the factors that become the indicative of the attitude or rationalization to justify the fraudulent action is the loss of entity values. Din as the