Case analysis 3
Chao Yao

Major case 1 Adelphia Communications Corporation 1. What are the facts?
In September 2005, the SEC charged Dearlove, a certified public accountant and formerly a partner with the accounting firm Deloitte& Touche LLP, with the improper conduct resulting in a violation of applicable professional standards. On July 24, 2009, the U.S. Court of Appeals for the District of Columbia supported the finding of the SEC that Dearlove engaged improper professional conduct. SEC found that Adelphia’s financial statements were not in accordance with the general accepted accounting principles and Dearlove violated general accepted auditing standards. The Adelphia communications Corporation was one of the largest cable television companies in the United States. Prior to 2000, the SEC found large amount Co-borrowed debt inside the company and its affiliated entities. After the big Enron scandal, SEC required public company to disclose the related-party transactions. As Adelphia disclosed its obligations as co-debtor with the Rigas entities, the stoke price of company declined sharply and finally was delisted from the NASDAQ. 2. What are the ethical issues?
Dearlove had engaged in unreasonable conduct, such as approval of the Adelphia’s method of accounting for related-party transactions. His behaviors resulted in a violation of applicable professional standards. Deloitte, who engaged in auditing Adelphia, did not issued a fair auditor’s report. Adelphia violated the accounting and reporting standard, such as improper offsetting receivables and payables, improper disclosure of its co-borrowed debt and adequacy of the note disclosure of Adelphia’s contingent liability and hiding debt from Adelphia to Rigas entities. 3. What are the norms, principles, and values?
Adelphia’s financial statements were not in accordance with the general accepted accounting principles and Dearlove violated general accepted auditing standards. Adelphia violate the accounting and reporting standards in their accounting book record. 4. What are the alternative courses of action? (1) Dearlove should be more professional and skeptical to the “higher than normal risk” of Adelphia and take more extensive supervision by the auditor with final responsibility for the engagement during both the planning and conduct of the engagement. (2) Adelphia management should take suggestion made by auditor manager Ivan Hofmann and others to disclose the specific dollar amount of Rigas entities’ co-borrowings instead of continually ignored Deloitte’s suggestions. (3) Deloitte should communicated with audit committee of the company or the board of the directors. If both of those are indifferent to the problem, the auditing firm should report the fraud to the SEC. (4) Dearlove and Deloitte just engaged in the auditing service and continually approve the improper accounting method used by Adelphia. 5. What is the best course of action?
The third one is the best course. 6. What are the consequences of each possible course of action? (1) Dearlove may not violate the GAAS if he increase his professional care and skepticism, as when Deloitte present a high risk of existing of material misstatement or fraud. (2) Company will correct their accounting treatment as soon as possible and make a fair financial statement and disclose proper and adequacy information to creditors, shareholders, regulators and customers. Company may prevent from inappropriate accounting in related party transactions and keep it from destroying the reputation and bankrupt finally. (3) Deloitte would not be charged by SEC if they tried to solving or reporting the disclosure problem and accounting fraud existing in Adelphia as soon as they notified. (4) Financial information of Adelphia still be distorted by corporation and auditors still not tailor their examinations to obtain satisfaction concerning the purpose, nature, and the extent of those transactions on the financial statement. 7. What is the decision?
From the perspective of the corporation, it should enhance its supervision to management level from the board of directors and internal control system. From the auditing firm and auditor partner’s perspective, they should be professional skepticism in auditing procedure and make sufficiently understand of its client to complete their auditing service. 8. Questions: (1) Adelphia involved in fast growing and volatile industry and complex structure of corporation and large number of affiliated entities. Large amount of debt and was near the limitation of company’s financial resources. It will impair the ability to obtain additional financial for continuing operating. Centralization of management in Adelphia and lack compensating control. Rigas family take a big control in the management of company. Management lacked professional accounting knowledge to make an appropriate accounting treatment and tend to interpret accounting standards aggressively and cook the book. In addition, Adelphia engaged in huge related-party transactions with affiliated entities. (2) Adelphia violate GAAP in offset its account payable and receivable of its various subsidiaries against the accounts payable and receivable of Rigas entities on a global basis. This accounting issue fit into shenanigans (failing to record or improperly reducing liabilities) and it will affect earnings of company. According to the GAAP, netting is appropriate only when two parties are involved; Adelphia violate the principle because its netting involved more than two parties. In consequence, management can manipulate earnings by netting accounts payable against the accounts receivable, which leads overstatement of earnings. Second, Adelphia subsidiaries and some of the Rigas entities had entered as co-borrowers into a series of credit agreement. It makes understate liabilities and expense to result into overstate revenue. This issue also fit into shenanigans. (3) Dearlove, as a certificated public accountant, should comply with the AICP code of professional conduct. Auditors should comply with the integrity and objectivity principle. In this case, Dearlove did not point out the related party transaction but approval of Adelphia’s method. Due care in the performance of professional responsibilities. Exercising due care means to perform services competently, accurately, and completely. In the case, Deloitte’s audit show a high risk of Adelphia. However, Dearlove do not tailor his examination to obtain satisfaction on financial statement. He did not show enough focus on further audit procedures on large related-party transaction made by Adelphia and did not review the debt workpaper directly. He do not show professional skepticism during the auditing procedure. What’s more, auditors make negligence in the preparation of financial statement or records. In this case, Dearlove had acted unreasonably in signing an unqualified audit opinion stating that Deloitte had conducted its audit in accordance with GAAS and such audit provided a reasonable basis for its opinion that Adelphia’s 2000 financial statements fairly presented Adelphia’s financial position in conformity with GAAP.

Major case 6 Waste Management 1. What are the facts?
Waste Management in order to achieve the target earnings, its senior management making accounting fraud, including the understated costs and exaggerate benefits culture in the company's financial statements. Six former senior officers also received ill-gotten gains during the financial fraud. The auditor Arthur Andersen recommendation adjustment journal entries to correct these errors, but management has refused to make adjustments. Instead, waste management fraud secretly entered into an agreement with Andersen, the accumulated error in the last time write-off. Anderson even in the original audit and issued financial statements for each waste management in the restated financial statements and unqualified report. 2. What are the ethical issues?
For the top management of Waste Management, they do not made a good corporation governance in order to protect the benefit of their creditors. On the contrary, they fostered a culture of fraudulent accounting in corporation in order to only meeting their revenue target, including improperly eliminating or deferring current period expenses in order to inflate earnings. For the accounting firm, Andersen LLP, it did not take its responsibility in making a fairly report or opinion that the financial statement fairly presented client’s financial position, but instead helping Waste Management on their improper accounting practice. 3. What are the norms, principles, and values?
Waste Management manipulate their earnings and make an aggressive accounting records. This behavior violate the general accepted accounting principle. Auditors form Andersen didn't keep integrity, objectivity, and keep independent with Waste Management. In addition, Andersen also 4. What are the alternative courses of action? (1) Waste management should make adjustment as Andersen suggested by the PAJEs instead entered into an agreement with Andersen fraudulently to write off the accumulated errors over period of up to ten years (2) Board of director in Waste Management should enhance the supervision of corporation, especially in the management level fraud. Make a good corporation governance in in order to make sure corporation keep in a positive culture. (3) Andersen should not agree to make arrangement with Waste Management and point out the fraud made by company and communicate with the management for correcting and compensating the misstated financial statement and accounting treatment. If management level still ignore this problem, auditors should report to auditor committee or directly to the Board of Directors. 5. What is the best course of action?
The best course should be the third one. 6. What are the consequences of each possible course of action? (1) If Waste Management make adjustment in their accounting record correctly. The benefit of management level would be impaired and they cannot take ill-gotten gains anymore. From the perspective of company, company’s financial statement will be prepared fairly to creditors, shareholders and regulators. (2) Corporation should have a positive culture from the bottom employee to the management level. In this case, Waste Management fostered a culture of fraudulent accounting, which includes understated expenses and overstated earnings in the company’s financial statement in order to reach the earning target. (3) Andersen should keep integrity and objectivity during auditing procedure and figure out a modified opinion or adverse opinion if they finally make sure Waste present their financial statement with material misstatement and should communicate with company to correct wrong record. If management agree with correcting errors, company’s financial statement can be presented fairly. If management do not agree, Andersen should report the fraud to the higher governance. However, the reputation of company may be impaired if Andersen expose frauds to the SEC. 7. What is the decision?
From the perspective of corporation, Waste Management should keep the accounting treatment comply with the GAAP. Board of directors should enhance supervision to the management level and prevent fraud. Make a good corporation governance by enhance the internal control system and compensating approach to reduce employ’s incentive to commit accounting fraud. From the perspective of accounting firm, Andersen, auditors or accounting firm involved in auditing procedure should keep independent from the clients, including taking over major position in the client. Auditors should take responsibility of due care of their professional commission and comply with the integrity and objectivity principle. 8. Questions: (1) For the perspective of Andersen, it billed the company $11.8 million in other fees. A related entity, Andersen Consulting, also billed Waste Management about $6 million in additional non-audit fees, $3.7 million of which were related to a strategic review that analyzed the company’s overall business structure. Those behaviors are not permitted by the AICPA code of professional conduct. However, Andersen can receive a large amount additional fee for provide special works for Waste Management. (2) A. making unsupported charge in depreciation estimates, failing to record expense for decrease in the value of landfills as they were filled with waste, failing to record expense necessary to write off the costs of impaired and abandoned landfill development projects and Improper capitalization of interest on landfill development are fit the situation of shifting current expenses to a later or earlier period in the Schilit’s accounting shenanigans. B. Establishing inflated environmental reserve (liabilities) in connection with acquisitions so that excess reserves could be used to avoid recording unrelated environmental and other expenses. This accounting method also fit the category of shifting current expense to a later or earlier period. C. Netting one-time gains against operating expense fit the category of Boosting income with one-time gain. With this techniques, Waste Management can meet their purpose overstate operating income to meet their target. D. Manipulating reserve account balances to inflate earnings should be classified to failing to record or improperly reducing liability. (3) According to the APCPA code of professional conduct section 100, Andersen violate rule 102 of the code provides that in the performance of any professional service, a CPA should maintain objective and integrity, be free of conflict of interest. In this case, many former Andersen employees worked for Waste Management and most often in key financial and accounting position. This situation should belong to management participation threat. The threat that a member will take on the role of attest client management or otherwise assume management responsibilities for an attest client. This situation impaired independence of Andersen in some extent during they making attest service for their clients. Andersen also makes non-attest services to audit client and charged fee to Waste Management. Andersen also provided non-attest service to its client. This violate the professional service restricts and it will impair its independent from client. What’s more, Andersen received additional fee charged its client for special work, which was restricted by the code of professional conduct section 500, which states commission paid to a CPA for recommending or referring to a client any product or service of another party.