Waste Management, Inc's Accounting Scandal

1769 words (7 pages) Business Assignment

11th Jun 2020 Business Assignment Reference this

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Waste Management, Inc. is a North American corporation providing waste management, integrated waste management, and environmental services. The company was founded in 1968 by Larry Beck and is headquartered in Houston, Texas. The company became public in 1971 and by 1972, the company generated revenue of approximately $82 million. Waste Management, Inc. absorbed Service Corporation of America in the 1980s, leading to Waste Management, Inc. becoming the country’s largest waste management and environmental services business. The network of the organization comprises 346 transfer stations 293 active landfill disposal sites, 146 recycling plants, 111 landfill gas facilities for beneficial use and six independent power plants. Waste Management offers environmental services in the United States, Canada, and Puerto Rico to about 21 million private, manufacturing, government, and commercial customers. The company has the biggest trucking fleet in waste management with 26,000 collection and transfer vehicles.

Between 1992 and 1997, Waste Management, Inc. suffered several fraudulent crimes in its business. Waste Management, Inc. senior officers, including Dean Buntrock (Founder and CEO), Phillip Rooney (Former President), Thomas Hau (CAO), James Koenig (CFO), Herbert Getz (General Counsel), and Bruce Tobecksen (Vice President of Finance), began to participate in fraudulent activities involving accounting books for the business. One of the fraud activities which took place was to reduce depreciation costs by awarding and inflating salvage prices and increasing the useful life of the garbage trucks owned by the company. Depreciation costs must be included in the financial statements of a corporation every year as the assets owned are used up and do not have the same value as they were originally. In fact, another fraudulent activity with the accounting books was how officers refrained from reporting expenditures for any reductions in landfill quality. By doing this, fewer costs would be reported for the company, while more should have been added for this in fact. The officers have failed to report the expenditures needed to write off the costs of ineffective and abandoned landfill development projects. It in effect, suggested less expenditures on the financial state of the company. Furthermore, the officers assigned salvage values to assets that had no salvage values whatsoever before. In other words, this would expand an asset’s residual value which originally had none. Waste Management, Inc. has increased resources for the environment to reduce unnecessary operating costs. Netting helped reduce operating expenses of about $490 million. Another illegal behavior included capitalizing several costs improperly. This would defer the cost of the books. The organization also used geography entries to transfer millions of dollars in their income statement between the different line items. Basically, the company had fake income flowing into retained earnings, fake assets, and no change in financial statements liabilities. Waste Management, Inc. restated its profits for 1992-1997 by $1.7 billion in 1998, making it the largest historical restatement. It produced the fraud controversy of Waste Management, Inc. as it is now known today.

The reason the Waste Management issue happened was an attempt to achieve set revenue goals by increasing profits and pushing down or ignoring expenditures. Revenues did not rise as quickly as they should have been. The chief officers understood this and began to participate in fraudulent activities as stated above in order to show what they needed them to say in their financial statements. In a business like Waste Management the pay of officers is related to the profits earned by the company. If Waste Management, Inc. had to struggle to fall short of their target earnings, it would put the company’s officers at risk. In addition, the investors tried to commit fraud to protect their own lives. Earnings-related compensation results in a significant culture of cheating in any workplace environment. These officers had the ability within the financial statements of the corporation to commit fraud because they were all high up in the organization’s hierarchy. Dean Buntrock, the founder and CEO orchestrated a lot of fraud. Together with the other investors, Buntrock let greed interfere with the way the company works honestly and efficiently.

Since Waste Management, Inc. was a publicly traded company, their accounting records had to be audited by the government. They retained one of the Big Five companies, Arthur Andersen, for the audit. Arthur Andersen found errors in the accounting books of Waste Management, Inc. and would come up with changes and strategies to correct them however, the officers of Waste Management Inc. refused to make the improvements recommended by Arthur Andersen. The stakeholders bribed Arthur Andersen by telling them that they would receive additional fees outside the agreement they had originally made. In addition, Arthur Andersen gave unqualified recommendations in the Waste Management, Inc. audit report and over time wrote down the accounting errors to cover up the fraud. Waste Management was not only committing fraud on their accounting books, but by bribing Arthur Andersen they were also performing illegal acts now.

In fact, Arthur Andersen was not just an accounting company of any kind to Waste Management, Inc. shareholders. James Koeing, the Waste Management, Inc. CFO, has been trained as an auditor at Arthur Andersen. Thomas Hau, who was the CAO of Waste Management, Inc., qualified as an accountant at Arthur Andersen, has been a partner there for 30 years, has been the Waste Management, Inc. audit partnership partner, and has been the director of the Waste Management audit division of Arthur Andersen. Bruce Tobecksen who was Waste Management’s Vice President of Accounting was the Waste Management Audit Director. These important chief officers at Waste Management, Inc. all came from Arthur Andersen, who was the company in charge of the audit of Waste Management. There was a sense of pressure on the accountants since there was such a close knit relationship with Waste Management. This friendly relationship between the two firms generated problems in Waste Management, Inc’s audit process. Waste Management, Inc.’s investors were able to get away with a lot of their wrongdoing because of who their auditor was, where the partnership was very close between the two firms. Arthur Andersen was fined $7 million for the Waste Management, Inc. case in its entirety.

This controversy impacted the world of waste management because they were forced to merge with another business which resulted in many job losses and then the company faced charges after the merge. The corporation was also still being fined and sued by its stockholders. The big ordeal gave investors a lot of questions, questioning if it was worth investing in a company that had to “cook the books” to look presentable. Over the past few years, the company had been through five CEOs. This controversy influenced the accounting firm by adding the cases in which they engaged to their list of fraud. The accounting firm insisted they were “working for the company’s best interest,” but millions of dollars in fraud charges are not in the best interest of a client. The Scandal had an impact on the company because they had to integrate with the U.S. waste system. It later failed and resulted in charges to the waste management company of more than $1.2 billion. Waste management Inc. lost more than $6 billion of their investment market value and ruined most investor relationships. This led to a significant fall in stock value of about $25 billion.

Waste Management Inc. continues to operate in many countries, including Canada, Untied States and Puerto Rico expanding their services. The company was able to expand its services to supply waste-to-energy plants, beneficial use of landfills, gas plants, and production sites for power plants. They were able to get back to success after the company received a new CEO by buying new technology, keeping up with safety standards and operating practices that helped the business to get back on its feet and have a fresh start. Many of the workers involved in the scandal were unable to return to the business world. Many of them have also been fined for their offences. The participants made a settlement for insider trading allegations with the commission where the corporation settled on 26.8 million. I do believe the penalties imposed on Waste Management Inc. were adequate from my perspective The new CEO has created an anonymous workplace hotline where workers can report conduct that is unethical or illegal. This will ensure that workers have the opportunity to express their feelings without the thought of losing their job, particularly with the problem involving top executives in this case. To make sure that the reports are maintained and correct the company hired auditors and financial clerks. The workers also speak to the CEO to ensure they keep up with their job and make good decisions on the company’s behalf. The Company admitted “past errors” and restated their financial records in order to reflect the real figures of the firms.

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