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Waste Management: A Focus On General Computing Controls
Waste Management: A Focus On General Computing Controls
150
SEC v. Dean L. Buntrock, Phillip B. Rooney, James E. Koenig, Thomas C. Hau, Herbert A. Getz, and Bruce D.
SEC Accounting and Auditing Enforcement, Release No. 1277, June 21, 2000,
http://www.sec.gov/litigation/admin/34-42222.htm.
On July 29, 1998, less than two weeks after the merger closed, WMI reiterated the 1999 earnings forecast. WMI also
introduced its senior management team on this date. Interestingly, although almost 80 percent of the regions and
districts were staffed primarily by former Waste Management personnel, all of the senior managers at the corporate
level were from USA Waste Service.
The success of the mergers transition was highly dependent on the successful conversion of the accounting and
billing systems of the operating entities that were part of Waste Management to the systems of USA Waste Service.
The company completed tests of the accounting and billing systems conversions in the fall of 1998 and hoped to
complete its full-scale conversion of these systems by the end of the first quarter of 1999.
Numerous Problems
In the early months of 1999, however, USA Waste Service experienced numerous problems with its newly
consolidated accounting system. In particular, it did not provide the companys field and corporate management
with access to timely financial management information, which it needed to monitor the companys operations. To
address this issue, USA Waste Service developed an additional management information system to provide such
financial reports. However, this system was not linked to the enterprise-wide general ledger system. As a result, a
significant offline entry and reconciliation process had to be completed at each level of the companys operations.
Thus, the information in the enterprise-wide system was often incomplete or inaccurate, and it required extensive
and time-consuming manual reconciliations. Meanwhile, the conversion of the old Waste Management operating
entities billing system to the USA Waste Service system led to delayed and sometimes erroneous billing of
customers.
So, to obtain an estimate of second quarter operating results, corporate financial personnel collected estimates
from each of the five domestic operating areas. The results showed an estimated revenue shortfall from its target of
more than $200 million and an earnings per share shortfall of $.11 for the second quarter of 1999. Throughout the
month of June, management received additional information suggesting potential problems with second quarter
results. Yet, in discussions with analysts and other members of the public at the 1999 Waste Expo conference from
June 7 to 9, 1999, one of the largest waste industry trade meetings, WMI maintained its second quarter earnings
guidance of $.78 to $.81 per share.
151a
Ibid.
Following the June 9 Waste Expo, the company received a steady stream of adverse information. Therefore,
WMI issued a press release on July 6, 1999, reporting a $250 million projected revenue shortfall from target levels
and earnings per share forecasts in the range of $.67$.70 for the second quarter of 1999 and $2.65$2.70 for 1999.
By the close of trading on July 7, the companys share price had fallen from more than $53.50 per share to below
$34 per share.
Following the July 6 announcement, the companys Board of Directors appointed a three-member Executive
Committee of independent members of the Board to oversee the management of the company. During July and
August 1999, the Executive Committee and the Board requested and accepted the resignation of the companys
CFO, general counsel, COO, and CEO. The Board also ordered the creation of an updated and more effective
financial system. After a detailed review of the companys accounting records, the company recognized $1.23
billion in after-tax charges and adjustments to expenses.
Case Questions
1.
What is the difference between an information technology general computing control and an application
control? Provide an example of each in your response.
2.
Please consult Paragraphs #49 and 114 of PCAOB Auditing Standard No. 2. Based on the case information,
how would you evaluate the control environment at WMI? Provide support for your evaluation.
3.
Consult Paragraph #50 of PCAOB Auditing Standard No. 2. Do you believe that the information technology
general controls have a pervasive effect on the reliability of financial reporting at an audit client like WMI?
Why or why not? Please be specific.
4.
Please consult Q5 of the PCAOB Staff Questions & Answers (June 23, 2004). Given the PCAOBs position on
M,D&A information, do you believe that the audit firm should be providing assurance on the information
contained in public company press releases? Why or why not?