Managemtny

“Arthur Andersen and its partners failed to stand up to company management and thereby betrayed their ultimate allegiance to Waste Management’s shareholders and the investing public,” said SEC Director of Enforcement Richard H. Walker. “Given the positions held by these partners and the duration and gravity of the misconduct, the firm itself must be held responsible for the false and misleading audit reports issued in its name. … Accountants play a critical role in providing access to our capital markets. We will not shy away from pursuing accountants and accounting firms when they fail to live up to their responsibilities to ensure the integrity of the financial reporting process.”

In connection with the audit of Waste Management’s 1993 financial statements, Andersen proposed a series of “action steps” that would change the company’s improper accounting practices in future periods and to write off its prior misstatements over a five- to seven-year period, rather than immediately correcting them in accordance with GAAP. Andersen also allowed Waste Management to, in Andersen’s own words, “bury” certain charges by improperly netting them against unrelated, one-time gains. Andersen told Waste Management that its use of netting was an “area of SEC exposure” but nonetheless allowed it to occur. When the misstatements were ultimately revealed, Waste Management announced the largest restatement in American corporate history. In issuing an unqualified audit report on the restated financial statements, Andersen acknowledged that the financial statements it had originally audited were materially misstated.

Although the SEC’s complaint and its settlement action with Andersen made no mention of auditor independence violations, acting SEC Chairman Laura Unger commented in a June 26 Wall Street Journal article that the SEC now had a “smoking gun” illustrating a clear instance where an auditor’s independence was compromised. In the course of the SEC’s independence...