Shortly after the announcement that Waste Management had overstated reported pretax earnings by \($1.43\) billion for the years 1993 through 1996, the company entered into a merger agreement with USA Waste Service, which was also in the business of collecting, transporting, and disposing of solid waste.

The newly merged entity, named Waste Management Incorporated (WMI), forecast 1999 earnings per share in the range of \($2.90\) to \($3.05\), which took into account anticipated synergies as a result of the merger. WMI’s Accounting and Billing Systems4 On July 29, 1998, less than two weeks after the merger closed, WMI reiterated the 1999 earnings forecast. WMI also introduced its senior management team on this date. Interestingly, although almost 80 percent of the regions and districts were staffed primarily by former Waste Management personnel, all of the senior managers at the corporate level were from USA Waste Service.
The success of the merger’s transition was highly dependent on the successful conversion of the accounting and billing systems of the operating entities that were part of Waste Management to the systems of USA Waste Service. The company completed tests of the accounting and billing systems conversions in the fall of 1998 and hoped to complete its full-scale conversion of these systems by the end of the first quarter of 1999.
Problems with Consolidated Accounting System In the early months of 1999, however, USA Waste Service experienced numerous problems with its newly consolidated accounting system. In particular, the system did not provide the company’s field and corporate management with access to timely financial management information, needed to monitor the company’s operations. To address this issue, USA Waste Service developed an additional management information system to provide such financial reports. But this system was not linked to the enterprisewide general ledger system. As a result, a significant offline entry and reconciliation process had to be completed at each level of the company’s operations. Thus the information in the enterprisewide system was often incomplete or inaccurate, and it required extensive and time-consuming manual reconciliations. Meanwhile the conversion of the old Waste Management operating entities’ billing system to the USA Waste Service system led to delayed and sometimes erroneous billing of customers.
So to estimate second-quarter operating results, corporate financial personnel collected estimates from each of the five domestic operating areas. The results showed an estimated revenue shortfall from its target of more than \($200\) million and an earnings per share shortfall of \($.11\) for the second quarter of 1999.
Throughout the month of June, management received additional information suggesting potential problems with second-quarter results. Yet in discussions with analysts and other members of the public at the 1999 Waste Expo conference from June 7 to 9, 1999, one of the largest waste industry trade meetings, WMI maintained its second-quarter-earnings guidance of \($.78\) to \($.81\) per share........

Case Questions

1. What is the difference between an information technology general computing control and an automated application control? Provide an example of each in your response.
2. Do you believe that information technology general controls have a pervasive effect on the reliability of financial reporting at an audit client like WMI? Why or why not? Please be specific.
3. Define what is meant by a benchmarking strategy. Based on the case information, do you believe that a benchmarking strategy would have been appropriate during the first year audit at WMI? Why or why not?
4. Given the PCAOB’s view, do you believe that the audit firm should be providing assurance on the information contained in public company press releases? Why or why not?