CASE 1.1: Waste Management: the Matching Principle

1. The definition and the importance of matching principle under GAAP
Matching principle: Expenses have to be matched with revenues as long as it is reasonable to do so. Expenses are recognized not when the work is performed, or when a product is produced, but when the work or the product actually makes its contribution to revenue. Only if no connection with revenue can be established, cost may be charged as expenses to the current period. The matching principle plays an important role in the recording of expenses. First, since the matching principle recognizes expenses in the period in which related revenues are recognized, it affects a company’s bottom line reported in the income statement. Second, it facilitates a more accurate evaluation of actual profitability and performance during the period in question of a company.

2. Waste Management’s violation of matching principle
The matching principle requires that companies depreciate the cost of the asset over its expected life span. Waste Management made unsupported changes to the estimated useful lives and salvage values of its assets. It violated the matching principle by posting depreciation expenses that did not match the revenues recognized in a specific period. Consequently, the understated depreciation expenses also affected the bottom line on the financial statements which delivered misleading profitability information to the investors.

3. Whether Waste Management conducted an effective internal control
Waste Management didn’t perform an effective internal control related to depreciation expense recording: First, there was no monitoring process on the top-side adjustments at the corporate level which affected the quality of internal control over periods. Second, control environment is the foundation of internal control but Waste