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Auditing

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Submitted By armygirl35
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In the process of accountancy reforming and internationalizing, our country refers to the accounting standards in the USA to a large degree. However the audit failure always happens in America accounting firms. In recent years, a series of financial embezzling cases have taken place in the United States. The quantities and influence wouldn’t be anticipated.

Audit failure means that CPA provides error audit opinion for unfaithful statements because he or she doesn’t confirm to audit standard. Audit risk is the risk that the auditor may unknowingly fail to appropriate his opinion on financial statements that are materiality misstated. The main difference of audit failure and audit risk is that CPA whether or not conforms to audit standard.

There are six reasons which can lead to audit failures. The first is the lack of sound legal system; the second in the circulation of marketing economy was not standard; the third is short of independence; the fourth is that accounting firms and CPA is a lack of professional ethics; the fifth is that CPA don’t have sufficient professional cautions and occupation concerns; the sixth is that quality system is not strict.

The Securities and Exchange Commission filed suit on March 26, 2002, against the founder and five other former top officers of Waste Management Inc., charging them with perpetrating a massive financial fraud lasting more than five years. The complaint, filed in U.S. District Court in Chicago, charges that defendants engaged in a systematic scheme to falsify and misrepresent Waste Management's financial results between 1992 and 1997.

The complaint names Waste Management's former most senior officers: Dean L. Buntrock, Waste Management's founder, chairman of the board of directors, and chief executive officer during most of the relevant period; Phillip B. Rooney, president and chief operating officer, director, and CEO for a portion of the relevant period; James E. Koenig, executive vice president and chief financial officer; Thomas C. Hau, vice president, corporate controller, and chief accounting officer; Herbert Getz, senior vice president, general counsel, and secretary; and Bruce D. Tobecksen, vice president of finance. According to Thomas C. Newkirk, "Our complaint describes one of the most egregious accounting frauds we have seen," said Thomas C. Newkirk, associate director of the SEC's Division of Enforcement. "For years, these defendants cooked the books, enriched themselves, preserved their jobs, and duped unsuspecting shareholders."(www.sec.gov). Also according to the complaint, the defendants violated, and aided and abetted violations of, antifraud, reporting, and record-keeping provisions of the federal securities laws. The Commission is seeking injunctions prohibiting future violations, disgorgement of defendants' ill-gotten gains, civil money penalties, and officer and director bars against all defendants. "Defendants' fraudulent conduct was driven by greed and a desire to retain their corporate positions and status in the business and social communities," Newkirk said. "Our goal is to take the profit out of securities fraud and to prevent fraudsters from serving as officers or directors of public companies." (www.sec.gov).
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| |The complaint alleges that the defendants played the following roles in the scheme: |
| |Buntrock - the driving force behind the fraud. He set earnings targets, fostered a culture of fraudulent accounting, personally directed certain |
| |of the accounting changes to make the targeted earnings, and was the spokesperson who announced the company's phony numbers. At the same time, |
| |Buntrock posed as a successful entrepreneur. With charitable contributions made with fruits of his ill-gotten gains or money taken from the |
| |company, Buntrock presented himself as a pillar of the community. For example, just 10 days before certain of the accounting irregularities first|
| |became public; he enriched himself with a tax benefit by donating inflated company stock to his college alma mater to fund a building in his |
| |name. He was the primary beneficiary of the fraud and reaped more than $16.9 million in ill-gotten gains from, among other things, |
| |performance-based bonuses, retirement benefits, charitable giving, and selling company stock while the fraud was ongoing. |
| | |
| |Philip Rooney - in charge of building the profitability of the company's core solid waste operations and at all times exercised overall control |
| |over the company's largest subsidiary. He ensured that required write-offs were not recorded and, in some instances, overruled accounting |
| |decisions that would have a negative impact on operations. He reaped more than $9.2 million in ill-gotten gains from, among other things, |
| |performance-based bonuses, retirement benefits, and selling company stock while the fraud was ongoing. |
| | |
| |James Koenig- primarily responsible for executing the scheme. He also ordered the destruction of damaging evidence, misled the company's audit |
| |committee and internal accountants, and withheld information from the outside auditors. He profited by more than $900,000 from his fraudulent |
| |acts. |
| | |
| |Thomas Hau- principal technician for the fraudulent accounting. Among other things, he devised many "one-off" accounting manipulations to deliver|
| |the targeted earnings and carefully crafted the deceptive disclosures. He profited by more than $600,000 from his fraudulent acts. |
| | |
| |Bruce Tobecksen - another accounting expert who was Koenig's right-hand man. In 1994, he was enlisted to handle Haul’s overflow. He profited by |
| |more than $400,000 from his fraudulent acts. |
| | |
| |Herbert Getz- the company's general counsel. Getz blessed the company's fraudulent disclosures and profited by more than $450,000 from his |
| |fraudulent acts. |
| |The complaint alleges that defendants fraudulently manipulated the company's financial results to meet predetermined earnings targets. The |
| |company's revenues were not growing fast enough to meet these targets, so defendants instead resorted to improperly eliminating and deferring |
| |current period expenses to inflate earnings. They employed a multitude of improper accounting practices to achieve this objective. Among other |
| |things, the complaint charges that defendants: |
| |1. avoided depreciation expenses on their garbage trucks by both assigning unsupported and inflated salvage values and extending their useful |
| |lives, |
| | |
| |2. assigned arbitrary salvage values to other assets that previously had no salvage value, |
| | |
| |3. failed to record expenses for decreases in the value of landfills as they were filled with waste, |
| | |
| |4. refused to record expenses necessary to write off the costs of unsuccessful and abandoned landfill development projects, |
| | |
| |5. established inflated environmental reserves (liabilities) in connection with acquisitions so that the excess reserves could be used to avoid |
| |recording unrelated operating expenses, |
| | |
| |6. improperly capitalized a variety of expenses |
| | |
| |7. failed to establish sufficient reserves (liabilities) to pay for income taxes and other expenses. |
| |The Defendants' improper accounting practices were centralized at corporate headquarters, according to the complaint. Each year, Buntrock, |
| |Rooney, and others prepared an annual budget in which they set earnings targets for the upcoming year. During the year, they monitored the |
| |company's actual operating results and compared them to the quarterly targets set in the budget, the complaint says. To reduce expenses and |
| |inflate earnings artificially, defendants then primarily used "top-level adjustments" to conform the company's actual results to the |
| |predetermined earnings targets, according to the complaint. The inflated earnings of prior periods then became the floor for future |
| |manipulations. The consequences, however, created what Hau referred to as a "one-off" problem. To sustain the scheme, earnings fraudulently |
| |achieved in one period had to be replaced in the next. |
| |The Defendants also allegedly concealed their scheme in a variety of ways. They are charged with making false and misleading statements about the|
| |company's accounting practices, financial condition, and future prospects in filings with the Commission, reports to shareholders, and press |
| |releases. They also are charged with using accounting manipulations known as "netting" and "geography" to make reported results appear better |
| |than they actually were and avoid public scrutiny. Defendants allegedly used netting to eliminate approximately $490 million in current period |
| |operating expenses and accumulated prior period accounting misstatements by offsetting them against unrelated one-time gains on the sale or |
| |exchange of assets. They are charged with using geography entries to move tens of millions of dollars between various line items on the company's|
| |income statement to, in Koenig's words, "make the financials look the way we want to show them." |
| |Defendants were allegedly aided in their fraud by the company's long-time auditor, Arthur Andersen LLP, which repeatedly issued unqualified audit|
| |reports on the company's materially false and misleading annual financial statements. At the outset of the fraud, management capped Andersen's |
| |audit fees and advised the Andersen engagement partner that the firm could earn additional fees through "special work." Andersen nevertheless |
| |identified the company's improper accounting practices and quantified much of the impact of those practices on the company's financial |
| |statements. Andersen annually presented company management with what it called Proposed Adjusting Journal Entries ("PAJEs") to correct errors |
| |that understated expenses and overstated earnings in the company's financial statements. During the 1990’s fourteen employees worked for Waste |
| |Management in key financial and accounting positions. |
| |Management consistently refused to make the adjustments called for by the PAJEs, according to the complaint. Instead, defendants secretly entered|
| |into an agreement with Andersen fraudulently to write off the accumulated errors over periods of up to ten years and to change the underlying |
| |accounting practices, but to do so only in future periods, the complaint charges. The signed, four-page agreement, known as the Summary of Action|
| |Steps identified improper accounting practices that went to the core of the company's operations and prescribed 32 "must do" steps for the |
| |company to follow to change those practices. The Action Steps thus constituted an agreement between the company and its outside auditor to cover |
| |up past frauds by committing additional frauds in the future, the complaint charges. |
| |Defendants could not even comply with the Action Steps agreement, according to the complaint. Writing off the errors and changing the underlying |
| |accounting practices as prescribed in the agreement would have prevented the company from meeting earnings targets and defendants from enriching |
| |themselves, the complaint says. |
| |Defendants' scheme eventually unraveled. In mid-July 1997, a new CEO ordered a review of the company's accounting practices. That review |
| |ultimately led to the restatement of the company's financial statements for 1992 through the third quarter of 1997. When the company filed its |
| |restated financial statements in February 1998, the company acknowledged that it had misstated its pre-tax earnings by approximately $1.7 |
| |billion. At the time, the restatement was the largest in corporate history. |
| |As news of the company's overstatement of earnings became public, Waste Management's shareholders (other than the defendants who sold company |
| |stock and thus avoided losses) lost more than $6 billion in the market value of their investments when the stock price plummeted by more than |
| |33%. |
| |It was a smelly mess facing A. Maurice "Maury" Myers when he took over Waste Management in November 1999. Myers, now 63, had succeeded in turning|
| |around two other troubled companies: trucking firm Yellow Corp. and America West Airlines (he left in 1996 after having tripled the stock price |
| |in two years). Today, after nearly four years of steady effort, Waste Management's odor is decidedly sweeter. Myers has managed to reduce the |
| |company's debt by nearly a third, to $8.3 billion; the stock has soared 85% from its March 2000 low. Meanwhile, net income rose 9% last year; |
| |free cash flow is expected to jump 30% this year, to nearly $1 billion. This past spring came a huge milestone: Rating agencies upgraded Waste |
| |Management's debt from junk to investment grade. Perhaps most important, Waste Management is no longer a pariah. "There has been a complete |
| |change in this company, with new talent, new direction, new focus, and new priorities," says Roman Super, a debt analyst at Standard & Poor's |
| |Ratings Services. "Investors like what they've seen so far. |
| |Independence is the core of audit, also the source of development of CPA profession. One of the main reasons of audit failure is lack of in the |
| |process of audit. In China, it already need to strength professional ethical education, build up accountancy integrity and credit, keep |
| |sufficient independence. One is that non-audit deal should be restricted. Sarbanes-Oxley Act of 2002 confined the non-audit deal about nine |
| |kinds. After the deal is sanctioned by Public Company Accounting Organized Board, the non-audit deal could be done. The other is carrying out |
| |evading system, defining the condition of evading. |
| |If the corporate governance and internal audit are the first gateway to ensure true and reliable information of accounting, independent audit is |
| |the last line to guard against accounting mistakes and embezzlement. If the last line were wrong, accounting information would be distorting, |
| |stock markets would be disordering, and the whole social economy would be paralyzing. Therefore, the supervision must be strengthened. The |
| |pre-chairman of SEC Arthur Levitt who audits the auditors, which abundantly clarified the importance of professional supervision. The first is |
| |carrying out periodically rotated system. The second is strengthening CPA professional supervision. The third is re-auditing the audit of CPA. |
| |The fourth is enlarging the punishment to violent behavior of CPA. |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |References |
| |www.sec.gov |
| |Yan Lui. The Analysis of Audit Failure in America Waste Management Inc. Chinese Certified Public Accountant. 2003 pg.40-43. |
| |www.wastemanagement.com/about |
| |www.cnn.com Waste management scandal 2001 |
| |www.sec.gov Immediate release 2002 |
| |Garrison, R.H., Noreen, E & Brewer P.C (2010) Managerial Accounting)14 ed. McGraw-Hill/Irwin |
| |www.corporations.org/wmi |
| |www.en.wikipedia.org/wiki/wastemanagement |
| |www.money.cnn.com |
| |www.answers.com/topic/wastemanagement |
| |DAWN HARVEY |
| | |
| |ACC569 |
| |Systems Auditing |
| | |
| |June 27, 2010 |
| | |
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| | |

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...organisations has created the need for a specialist in various business controls: the internal auditor. We can understand better the nature of internal auditing today if we know something about the changing conditions in the past and the different needs these changes created. What is the earliest form of internal auditing and how did it come into existence? How has internal auditing responded to changing needs? As the operations of an organisation become more voluminous and complex, it is no longer practicable for the owner or top manager to have enough contact with all operations to satisfactorily review the effectiveness of performance. These responsibilities need to be delegated. The Development of the Profession of Internal Auditing Internal auditing has evolved from accounting-oriented to a management-oriented profession. At one time, internal auditing functioned as a junior to the independent accounting profession, and attesting to the accuracy of financial matters was the profession's main concern. Now internal auditing has established itself with a far broader focus. Modern internal auditing provides services that include the examination and appraisal of controls, performance, risk and governance throughout public and private entities. Financial matters represent only one aspect of the purview of internal auditing. Requirement to have Internal Audit Activity In January 2004, the US Securities and Exchange Commission (SEC) had approved new rules proposed...

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Premium Essay

Auditing

...CHAPTER 2 OVERVIEW OF AUDITING I. Review Questions 1. One definition of auditing is that it is a systematic process by which a competent, independent person objectively obtains and evaluates evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users. The Philippine Standards on Auditing (PSA) 120 “Framework of Philippine Standards on Auditing” states the objective of an audit as follows: “The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared in all material respects, in accordance with an identified financial reporting framework.” 2. This apparent paradox arises from the distinction between the function of auditing and the function of accounting. The accounting function is the process of recording, classifying and summarizing economic events to provide relevant information to decision makers. The rules of accounting are the criteria used by the auditor for evaluating the presentation of economic events for financial statements and he or she must therefore have an understanding of generally accepted accounting principles (GAAP), as well as generally accepted auditing standards (GAAS). The accountant need not, and frequently does not, understand what auditors do, unless he or she is involved in doing audits, or has been trained...

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