USD professors publish accounting fraud article University of South Dakota Professors Srini Ragothaman and Tom Davies, along with USD alumnus and former School of Business professor Bill Wilcox, recently published a case study on financial statement fraud in Issues in Accounting Education, a leading national journal published by the American Accounting Association.
The authors examined the fraudulent activity that occurred in Waste Management Inc. (WMI) between 1992 and 1996.
After a rigorous review process, their case study was published in August, 2003. The acceptance rate for this association-wide journal is about 12 percent, and the journal is distributed to over 8,000 subscribers.
When WMI failed to meet revenue and earnings expectations of Wall Street, its stock price dropped radically. Management took drastic action to avoid another Wall Street disappointment, booking ordinary losses as "one-time" charges.
In addition, management began to inflate reported net income by fraudulently accounting for depreciation expenses on its garbage vehicles and dumpsters, underreporting expenses related to its landfill costs, ignoring asset impairments, and improperly measuring its environmental liabilities.
In 1997, a strong investor block elected a new chief executive officer who ordered a re-audit which led to a $1.87 billion adjustment to 1997 earnings.
The audit also led to a restatement of the results for the periods from 1992 through 1996. The total restatement of owners' equity for those periods was approximately $1.7 billion, which was the largest earnings restatement in history at that time.
Subsequently, however, WorldCom claimed the honor in 2002 with an earnings restatement of $11 billion.
"After the significant audit failures in Waste Management audits during 1992 through 1996, and after a civil fine of $6 million by the SEC, Arthur Andersen still made substantial mistakes in 1998, 1999 and 2000 audits of Enron and WorldCom," Ragothaman notes. The final blow came, when criminal charges were filed against Andersen by the Justice department in early 2002. One may easily again ask the age-old question as to why we fail to learn from past mistakes?
According to Professor Ragothaman, this case study "provides students with a better understanding of the concepts of earnings quality and earnings management. It enables students to recognize and more fully understand how management estimates can dramatically affect corporate earnings."
It is the authors' hope that lessons learned by students from using the case study may prevent similar mistakes from occurring in the future.