Waste Management Inc.

Accounting Scandal

1. Summary Of The Case

Waste Management, Inc. is a comprehensive waste company that was founded

in 1894 in North America by Larry Beck. The company went public in 1971 and by 1972,
the company was generating about $82 million in revenue and had made 133
acquisitions. The company offered environmental services to almost 20 million
customers in America, Canada, and Puerto Rico. In the years of the 1980s, Waste
Management, Inc. acquired Service Corporation of America, which led Waste many
different facilities.

Between the years 1992-1998, Waste Management were found to have

undergone one of the most remarkable accounting fraud situations of
all time. The U.S SEC (2002) explains how the founder, Buntrock, and five other senior
members of the company manipulated the financial position of the company in order
to meet the predetermined targets they had been set at the beginning of the financial
year.

The senior officers began to perpetrate the fraud using improper accounting
practices, not acceptable to the Generally Acceptable Accounting Principles
(GAAP). ‘Defendants cooked the books, enriched themselves, preserved their jobs, and
duped unsuspecting shareholders’ (U.S SEC, 2002) in order to meet their own financial
earnings targets.

The fraud case was intensified when the company’s long term auditors, Arthur
Andersen, along with three other partners, began to audit the year end
statements. Upon inspection, ‘Andersen fully understood the extent of the accounting
misrepresentations and repeatedly tried to press Waste Management executives to
change their practices or correct errors, with little success’ (Eichenwald,
2002). Andersen attempted to use Proposed Adjusting Journal Entries (PAJE’s), which
Waste Management were expected to use to correct their errors, however,
management refused (U.S SEC, 2002). Instead, Andersen became further involved with
the fraudulent case when the two companies came to an agreement, which involved
the write off of a build-up of errors over a 10-year period.

The fraud case unravelled in 1997 when Waste Management appointed a new
CEO, who initially began to review Waste Management’s financial statements and
ordered a restatement of the past 5 year’s financial statements ‘When the company
filed its restated financial statements in February 1998, the company acknowledged
that it had misstated its pre-tax earnings by approximately $1.7 billion. At the time, the
restatement was the largest in corporate history’ (U.S SEC, 2002).

As a result of the fraud, Waste Management ‘agreed to pay $26.8 million to

settle a lawsuit brought by the Securities and Exchange Commission against (the) four
former top executives’ (Schneirder, 2005), while they also lost massive amounts on their
market value. As for Arthur Andersen, they were made to pay shareholders $220 million
as well as $7 million to the U.S SEC.

2. Accounting Scandal

 IAS 1: Presentation of Financial Statements (AS 1. Disclosure of Accounting Policies)

Standard Practice:

Financial statements should disclose all “material” items, i.e. items the knowledge
of which might influence the decisions of the user of the financial statements

Company Practice:

The netting tactic allowed them to eliminate almost $500 million in operating
expenses from the financial statements, by “offsetting them against unrelated one-time
gains on the sale or exchange of assets.”

 IAS 16: Property, Plant and Equipment (IAS 6: Depreciation Accounting)

Standard Practice:

The method of depreciation is applied cosistently to provide comparability of the

results of the operations of the enterprise from period to period.

Company Practice:

The company significantly decreased the depreciation expenses on their

garbage trucks, by extending useful lives and changing salvage values

 IAS 16: Property, Plant and Equipment (IAS 10: Accounting for Fixed Assets)

1. Standard Practice:

Due to the nature of the landfills, GAAP also requires than a company compare
a landfill’s cost to its anticipated salvage value, with the difference depreciated over
the estimated useful life of the landfill.

Company Practice:

The company did not account for the decrease in value of their landfills, even
though these landfills were constantly being filled with waste.

2. Standard Practice:

Only expenditures than increases the future benefits from the existing asset
beyond its previously assessed standard of performance is included in the gross book
value

Company Practice:

The Company also improperly capitalized certain expenses than should not have
been capitalized. For example, they did not expense the cost of abondoned landfill
development projects, than were unsuccessful.

Opportunity- top executives, weak board of directors

Incentive- reaching predetermined earnings, enrich themselves

Attitude- reach high profit, benefit the company and shareholders

3. Recommendations and Conclusions

The three fraud risk factors must be reviewed and resolve. The opportunity factor
was led by the senior management. The CEO was one who participates and gave
opportunity to fraud. He started it by implementing an earning-based compensation
which will allow him and other officers to get higher salaries as long the earnings of the
company continously increases. He had the overall authourity on management.
Therefore, it is beneficial to the company to hire a new CEO that will avoid the way the
former CEO manage it. Moreover, all the officers who participated to the fraud, such as
the CFO and CAO, must also be replaced. They had this direct influence on the
financial statements of the company. The incentive factor was the relationship of the
officers’s compensation with the company’s earnings. This should not have been
intertwined to avoid the pressure on behalf of the officers. The attitude factor of fraud
that included meeting high profits and earnings would have to be eliminated.

The auditor had a cozy relationship with the officers of the Waste Management,
Inc. It is better to hire different auditor that will not allow themselves to accept bribes
like what Arthur Andersen did.

Other internal controls should have been instituted such as using a computer
software that will trace adjustments. Board of Directors should also act with professional
Skepticism in observing the assets and earnings performance of the company.