The Wall Street Journal (8/25/00) reported that the Securities Exchange Commission (SEC) may have found "smoking gun" proof of a corrupt relationship between Waste Management Inc. (WMI) and auditor/consultant Arthur Anderson. Having taken a $3.5 billion accounting charge reducing profits in 1998, WMI now faces a potential landmark SEC decision showing direct corruption in their arrangements with the Arthur Anderson company. WMI illegally and fraudulently announced exaggerated profits for several years. Anderson publicly approved the WMI announced profits. After WMI revised downward its profits, stockholders sued in 1999 and recently settled for $220 million in payments. The accounting charge had drastically reduced the value of WMI stock.
How did an "independent" auditor allow WMI to illegally boost its profits? The WMI/Anderson case reveals that from 1991 to 1997 WMI paid Arthur Anderson $10 million in auditing fees and about $50 million in consulting fees. The SEC, the government watchdog of public businesses, requires that the accounting books of all public corporations be annually audited by an independent auditing firm. They believe that consulting by auditors compromises the independence of auditing.
Business Week magazine's cover pictures SEC Chairman Arthur Levitt (9/25/00) as the investor's champion. Levitt wants to bust up the accounting/auditing giants to stop their cozy ties to corporations. The magazine reports the SEC evidence being developed of two cases, one being Waste Management.
WMI and Anderson are not the only cozy auditor/corporate relationship but this case evidently provides direct clear proof (a smoking gun) of a direct corrupt relationship. SEC Chief Accountant Lynn Turner remarked, "It's very difficult, if not impossible to prove" an independence violation. "You'd have to get into the auditor's head," she said. But the Wall Street Journal (WSJ) reported that Anderson's consulting centered on WMI's centralized computer system. Such activity would probably prove that Anderson was very aware of the fraudulent accounting done by WMI.
Such fraud by WMI is no surprise to those who follow WMI. The WSJ confirmed this point when it opened the article writing, "Among companies rocked by accounting scandals, Waste Management Inc. stands out."
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