Case 1.1 Waste Management: The Expense Recognition Principle Q.#5 Visit the PCAO

Question

Case 1.1

Waste Management: The Expense Recognition Principle

Q.#5 Visit the PCAOB website (i.e., www.pcaob.org), search for the "tip and referral center" and review the guidelines. Can you report a violation to the PCAOB anonymously? Next, consider the role of the Waste Management employee who was responsible for recording the proper amount of depreciation expense in the financial statments. Assuming that the employee knew that the consolidating entries in the fourth quater recorded by upper management were fraudulent, do you believe that the employee had a responsibility to report the behavior to the audit committee? Why or why not?

Explanation / Answer

Yes, the violations can be reported anonymously. According to the website, the PCAOB does allows to report a violation in an anonymous manner. However, according to the website, if you so wish to stay anonymous, the PCAOB asks “that you please contact us again, within 24 hours, so that we may ask any important follow-up questions in response to your tip or referral."

Yes, the employee should have reported the fraudulent behavior to the audit committee. Consistent with the notion that ethical behavior is that which conforms to moral rules and principles, the moral action to be taken would have been to report the fraudulent behavior. In fact, when an employee is thinking through his/her ethical decision process, he/she should realize that in the long run, they may be held responsible for their role in helping to prepare fraudulent financial statements. Clearly, the moral action is for the employee to tell the audit committee about the fraudulent entries

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