SECTION ONE
FRAUD CASES: VIOLATIONS OF ACCOUNTING PRINCIPLES 1
Case 1.1
Waste Management: The Expense Recognition Principle 3
Case 1.2
WorldCom: The Revenue Recognition Principle 7
Case 1.3
Qwest: The Full Disclosure Principle 11
Case 1.4
Sunbeam: The Revenue Recognition Principle 17
Case 1.5
Waste Management: The Definition of an Asset 21
Case 1.6
Enron: The Revenue Recognition Principle 25
Case 1.7
WorldCom: The Expense Recognition Principle 29
Case 1.8
Bernard L. Madoff Investment and Securities: Broker-Dealer Fraud 33
Case 1.9
Qwest: The Revenue Recognition Principle 37
Case 1.10
The Baptist Foundation of Arizona: The Conservatism Constraint 41
Case 1.11
WorldCom: The Definition of an Asset 45
Case 1.12
Bernard L. Madoff Investment and Securities: The Role of the Securities & Exchange Commission (SEC) 49
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viii Table of ContentsSECTION TWO
ETHICS AND PROFESSIONAL RESPONSIBILITY CASES 53
Case 2.1
Enron: Independence 55
Case 2.2
Waste Management: Due Care 59
Case 2.3
WorldCom: Professional Responsibility 63
Case 2.4
Enron: Quality Assurance 67
Case 2.5
Sunbeam: Due Care 71
Case 2.6
Bernard L. Madoff Investment and Securities: A Focus on Auditors’ and Accountants’ Legal Liability 75
Case 2.7
Enron: Audit Documentation 79
SECTION THREE
FRAUD AND INHERENT RISK ASSESSMENT CASES 83
Case 3.1
Enron: Understanding the Client’s Business and Industry 85
Case 3.2
The Baptist Foundation of Arizona: Related Party Transactions 89
Case 3.3
WorldCom: Significant Business Acquisitions 93
Case 3.4
Sunbeam: Incentives and Pressure to Commit Fraud 97
Case 3.5
Qwest: Understanding the Client’s Business and Industry 101
Case 3.6
Bernard L. Madoff Investment and Securities: Understanding the Client’s Business and Industry 105
Case 3.7
Waste Management: Understanding the Client’s Business and Industry 109
SECTION FOUR
INTERNAL CONTROL SYSTEMS: ENTITY-LEVEL CONTROL CASES 115
Case 4.1
Enron: The Control Environment 117
Case 4.2
Waste Management: General Computing Controls 121
Case 4.3
The Baptist Foundation of Arizona: The Whistleblower Hotline 125
Case 4.4
WorldCom: The Internal Audit Function 129
Case 4.5
Waste Management: Top-Side Adjusting Journal Entries 133
SECTION FIVE
INTERNAL CONTROL SYSTEMS: CONTROL ACTIVITY CASES 137
Case 5.1
The Fund of Funds: Valuation of Investments 139
Case 5.2
Enron: Presentation and Disclosure of Special Purpose Entities 143
Case 5.3
Sunbeam: Completeness of the Restructuring Reserve 149
Case 5.4
Qwest: Occurrence of Revenue 153
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Case 5.5
The Baptist Foundation of Arizona: Presentation and Disclosure of Related Parties 159
Case 5.6
Waste Management: Valuation of Fixed Assets 163
Case 5.7
Qwest: Occurrence of Revenue 169
SECTION SIX
COMPREHENSIVE COMPANY CASES 175
Case 6.1
Enron 177
Case 6.2
Waste Management 191
Case 6.3
WorldCom 207
Case 6.4
Sunbeam 223
Case 6.5
Qwest 237
Case 6.6
The Baptist Foundation of Arizona 251
Case 6.7
The Fund of Funds 263
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