Introduction
Waste Management is a publicly traded company that is located in Houston Texas. The company mainly provides waste management services to various clients across the North American region. The list of services that are provided by Waste Management Incorporated include collecting, transferring, recycling, and disposing refuse. The company is also known for generating energy from waste materials. Waste Management Inc. is a sizeable organization that has approximately twenty-million customers and employs around forty-five thousand people.
The company also boasts of considerable financial success having generated about $1.4 billion dollars in revenue in the 2009 financial year. Among the company’s future prospects is the goal to generate energy for approximately one million homes by the year 2020. Even though Waste Management qualifies to be a ‘blue chip’ company, its history is tainted by a recent accounting scandal that threatened to derail the company’s growth trajectory. This financial scandal can be attributed to ‘smart/creative’ accounting practices that were perpetuated by the top-level management at Waste Management. This paper is a report of the financial scandal that rocked the operations of Waste Management in 1998.
The Scandal
The events that surround the Waste Management scandal were set in motion when the company appointed a new Chief Executive Officer (CEO) in July 1997. Immediately after assuming office, Maurice Meyers, the new CEO went through the company’s financial books and discovered several anomalies. Consequently, the new CEO sought to conduct further investigation into the accounting issue. Further investigations revealed that in the period falling between the year 1992 and 1997, the top managers at Waste Management had colluded with their auditing partner and inflated the company’s pretax earnings by a substantial amount.
Research indicates that “the company’s revenues weren’t growing fast enough to meet earning targets so the colluders improperly eliminated and deferred current period expenses to inflate earnings using what the chief accounting officer called his “one-off” scheme” (Chartier 1). This ‘clever’ accounting impropriety is known as lapping and it involves covering the loopholes of one financial account with another and continuing with that cycle for all the accounts that fall short. Technically, the individuals who were involved in the scandal were not ‘stealing’ money from the company’s accounts but they were just covering their liabilities by deferring them to the next financial period.
After the new Waste Management realized about this impropriety, he lodged a complaint with the Securities and Exchange Commission (SEC). The SEC’s investigations assigned blame to six executives including those from the audit company. The specific details from the SEC’s investigations revealed that Waste Management’s managers intentionally neglected to account for the depreciation expenses of the company’s garbage trucks.
On the other hand, the managers assigned the garbage trucks impractical and exaggerated salvage values whilst extending their productive lives. The investigation also discovered that between 1992 and 2007 the managers began assigning salvage values to items that had no salvageable-value. The executives were also found to “establish inflated environmental reserves (liabilities) in connection with acquisitions so that excess reserves could be used to avoid recording unrelated operating expenses” (BBC 1). The scandal also pointed out the fact that Waste Management’s executives overstated the capital-value of several ventures while failing to factor in the expenses that are associated with these projects.
The list of the individuals who are involved in this scandal was made up of individuals who had the most control over the everyday operations of Waste Management. The individuals who had the most liability in the scandal included the company’s “CEO and Board Chairman Dean Buntrock, Chief Operating Officer Phillip Rooney, Chief Financial Officer Thomas Hau, Senior Vice President Herbert Genz, and Vice President of Finance Bruce Tobecksen” (Chartier 1). The chief architect and facilitator of the accounting scandal is thought to be Waste Management’s auditing partner Arthur Andersen.
Accounting Element
Arthur Andersen was the most prominent figure in this accounting scandal because it is his firm that was tasked with auditing Waste Management’s books. Before Arthur Andersen was embroiled in scandal, his firm had the reputation of coming up with revolutionary accounting methods. However, the audit firm was later to be embroiled in several accounting scandals between the 1990s and early 2000s (Rezaee 277).
The ‘genius’ in Arthur Andersen’s accounting methods is that they were backed up by solid documentation. Consequently, on most instances Arthur Andersen was able to convince various people that his accounting methods were valid. On the other hand, the audit firm was able to solicit money from companies such as Waste Management by convincing them that additional accounting consultancy was necessary. During the investigations, Andersen revealed that his firm only allowed Waste Management to continue with its fraudulent accounting practices because he believed they would correct short-term balance sheet anomalies.
Fines and Penalties
The SEC’s findings “found that Arthur Andersen and several key individuals specifically failed to stand up to management, and they issued qualified reports knowing that the reports contained misstatements and did not conform to GAAP or GAAS” (Chartier 1). Consequently, SEC fined Arthur Andersen a total of $7 million for his misconduct. In 2002, this was the biggest civil fine in relation to an accounting scandal.
Several individuals within Andersen’s firm were also fined for improper conduct such as Robert Allgyer the auditor who was in charge of the Waste Management accounts. Mr. Allgyer was ordered to pay a fine of $50,000 and stripped off auditing duties for a period of five years. Another Andersen employee, Edward Maier was fined $40,000 and he was accorded three years’ suspension. Another Andersen auditor was fined $30,000 and three years suspension for his role in the Waste Management accounting scandal.
The fines that were imposed on the Andersen’s employees were hefty but the ones that were imposed on Waste Management’s workers were even higher. As a company, Waste Management was fined a lump sum of $457 million as a result of the accounting fraud (Wells 34). Furthermore, the company’s top executives and other workers were fined a total of $30 million. Waste Management’s three top executives including the CEO, CFO, and Vice President of accounting were barred from ever serving as directors or officers in a public limited company.
Ethics and Change in Management
Waste Management had already began to implement changes in the company’s accounting procedures even before its accounting scandal had become public knowledge. The new CEO Maurice Meyers also sought to reinforce his employees’ ethics by setting up an anonymous hotline where they could report any unethical business practices.
The new initiative works in relation to the fact that employees are always aware of financial scandals as they are happening but fear of victimization always prevents them from volunteering information. The initiatives that were set up by the new CEO were fruitful because the prices of the company’s shares have risen steadily since he took over the management of Waste Management Inc.
References
BBC News. “WorldCom’s scandal one of many”. BBC News. 2002. Web.
Chartier, James. “Accounting fraud rising”. CNN News, 2002. Web.
Rezaee, Zabihollah. “Causes, consequences, and deterence of financial statement fraud.” Critical Perspectives on Accounting 16.3 (2009): 277-298. Print.
Wells, Joseph. Principles of fraud examination, Hoboken, NJ: John Wiley, 2008. Print.