In the fraud case under review, financial statements of Waste Management Inc. were falsified and misrepresented from 1992 until 1997 financial year (“Waste Management Founder, Five Others Sued for Massive Fraud”, 2018). During this period, perpetrators involved in fraudulent actions manipulated the company’s financial results to meet predetermined target earnings. The company’s current period expenses were also improperly eliminated and deferred in order to make the financial results attractive for current and potential shareholders.
The main players involved into the fraudulent actions were operating and financial top managers, as well as the chairman of the company’s Board of Directors. Particularly, executives involved into scandal are Dean L. Buntrock (the company’s founder and the chairman of the Board of Directors), Philip B. Rooney (maintained the positions of Chief Operating Officer and Chief Executive Officer during the considered period), James E. Koenig (Executive Vice President and Chief Financial Officer), Thomas C. Hau (Vice President, Corporate Controller and Chief Accounting Officer), Herbert Getz (Vice President and Secretary, General Counsel), Bruce D. Tobecksen (Vice President of Finance) (Khan, 2002).
As a result of the committed fraud and financial statements manipulation, perpetrators aimed to improve the company’s financial results and reach the predetermined earnings targets. Essentially, perpetrators have focused on reducing depreciation and unrelated operating expenses and inflating the company’s earnings (“Waste Management Founder, Five Others Sued for Massive Fraud”, 2018; Eichenwald, 2002). It should be noted that as a result of the misstatements and top-level adjustments to the financial information involved executives were able to maintain their top management positions while blinding the shareholders, as well as to increase their personal financial gain through the compensation programs and bonuses.
To falsify the company’s financial results, perpetrators have applied accounting manipulations known as ‘netting’ and ‘geography’ (“Waste Management Founder, Five Others Sued for Massive Fraud”, 2018). Particularly, depreciation expenses on the purchased garbage trucks were avoided by assigning them to higher salvage values and increasing their useful lives. Assets with no resale values were randomly assigned some salvage values to further reduce depreciation expenses. Next, expenses for decreases in the value of the company’s landfills, as well as the costs of unsuccessful landfill development, were failed to be reported. The company’s executives have manipulated excess reserves in order to offset unrelated operated expenses: particularly, environmental reserves on acquisitions were initially inflated so that they can be further reduced. Variety of other operational expenses were improperly capitalized. Finally, the company’s management has lowered reserves for income taxes and expenses. It should be noted that the company’s auditors, Anderson LLP, were involved into the fraud scheme. The auditor of Waste Management Inc. has been aware of the improper accounting practices and earned additional fees from the company for ‘special work’ (“Waste Management Founder, Five Others Sued for Massive Fraud”, 2018; Eichenwald, 2002).
The above-mentioned fraud schemes have led to the total misstatement of the company’s earnings in the amount of $1.7 billion (“Waste Management Founder, Five Others Sued for Massive Fraud”, 2018). Perpetrators have managed to ‘net’ (i.e. eliminate) the total amount of $490 million expenses. The executives of Waste Management Inc. also moved tens of millions dollars between the accounts on the income statement in order to create difficulties for audit teams and improve the company’ performance.
The fraud scheme was discovered in July 1997 after the new CEO of Waste Management Inc. has requested a review of the firm’s accounting practices. This review unraveled the overstatement of $1.7 billion in earnings and led to further investigation.
The fraud had had significant consequences for the company’s shareholders, executives and the auditor. Shareholders of Waste Management Inc. have lost about $6 billion due to the stock price decrease after the fraud scandal. Waste Management Inc. had to pay $457 million in class action lawsuit to the company’s shareholders. Few years later, the fraud accounting suit against the involved executives was settled for $30.8 million (“Waste Management Founder, Five Others Sued for Massive Fraud”, 2018). The amount charged for the perpetrators included the disgorgement, prejudgment interest, and civil penalty. The involved executives have been banned from serving as officers and directors of public companies.
The audit firm of the company during the considered period, Anderson LLP, was claimed to be in cahoots with the executive management. From the outset of the implemented fraud scheme, the executives of Waste Management Inc. have paid additional fees to the auditor firm for the ‘special work’. Typically, during the annual audits, the audit team have identified improper accounting practices in their reports, quantified the impact of these practices on the reported financial performance and issued the Proposed Adjusting Journal Entries report to correct understated costs and overstated revenue in the disclosed financial statements. However, the involved executives have declined the proposed adjustments and instead reached to the fraudulent agreement with the auditor to write off the accumulated misstatements for the previous years and to correct the accounting practices in the future periods. In 1998, SEC investigated the issue and determined that the auditor had knowingly and recklessly failed to prevent the issuance of materially misstated financial statements. As a result of the fraud discovery, Anderson LLP was fined for $7 million (“Waste Management Founder, Five Others Sued for Massive Fraud”, 2018).
Interestingly, the accounting restatement occurred as the consequence of fraud discovery has totaled $1.7 billion and is known to be the largest restatement entry in the history. Despite the significant fines and charges against the company, as well as reputational damage, Waste Management Inc. has managed to recover and now continues to provide services to the customers.
- Waste Management Founder, Five Others Sued for Massive Fraud. (2018). Sec.gov. Retrieved from https://www.sec.gov/news/headlines/wastemgmt6.htm
- Khan, K. (2002). SEC sues ex-Waste Management execs – Mar. 26, 2002. Money.cnn.com. Retrieved from http://money.cnn.com/2002/03/26/news/companies/waste/index.htm
- Eichenwald, K. (2002). Waste Management Executives Are Named in S.E.C. Accusation. Nytimes.com. Retrieved from https://www.nytimes.com/2002/03/27/business/waste-management-executives-are-named-in-sec-accusation.html