ISBN: 0-03-031529-8

NEWSWIRE - August 23, 2001

Topic: Earnings and Earnings Quality

Source: "Unusual Expenses Raise Concerns," by Aaron Elstein, Wall Street Journal, Thursday, August 23, 2001, page C1

Synopsis of Article: Waste Management, the nation's largest garbage hauler, recently beat analysts' forecasted pro forma earnings by classifying $1 million in truck painting expenses and $30 million of consulting fees as unusual expenses. The company argued that the trucks were painted one year earlier than normal and the consulting fees were part of a turnaround effort developing better information technology and market strategy systems, making these expenses unusual. Excluding unusual expenses from earnings can lead to higher quality earnings, however, many companies have been trying to shore up earnings by classifying what appear to be normal operating expenses as unusual expenses. This is not the first time that Waste Management has been questioned about aggressive accounting policies. The article provides an opportunity to discuss earnings and earnings quality and the impact on equity value.

Questions:

1. There has been much recent discussion of earnings quality. What is meant by earnings quality and why is it important?
2. Waste Management has classified some consulting fees and expenses to paint trucks as unusual expenses in order to improve their pro forma earnings. What are pro forma earnings and how do unusual expenses impact them?
3. Waste Management has a history of employing questionable accounting policies to influence its earnings numbers. How might this impact the value of Waste Management's stock?

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