The Waste Management, Inc.

1998 Fraud Scandal

 September 5, 2017

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 Management, Inc. to become the largest waste management and environmental services
company in the country. It was able to manage millions of tons of materials in many different
facilities.
Waste Management, Inc. experienced many fraudulent crimes within its company between the years
of 1992 and 1997. The senior officers at Waste Management, Inc., which included 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 engage
in fraudulent activities involving the company’s accounting books. One of the fraud activities that
occurred was avoiding depreciation expenses by assigning and inflating salvage values and
extending the useful lives of the garbage trucks that the company owned. Every year, depreciation
expense must be included in a company’s financial statements as the assets owned become used up
and do not have the same value as it originally had. Moreover, another fraudulent activity that
occurred with the accounting books was how the officers were refraining from recording expenses
for any decreases in the value of the landfills. By doing this, it would state less expenses for the
company, when in reality, there should have been more added for this. Next, the officers also
refused to record necessary expenses to write off the costs of unsuccessful and discarded landfill
development projects. This, in turn, stated less expenses on the company’s financial statements. In
addition, the officers assigned salvage values to assets that previously had no salvage values
whatsoever. In other words, this would extend the residual value of an asset that originally did not
have any. Waste Management, Inc. also increased environmental reserves to avoid irrelevant
operating expenses. Netting helped eliminate about $490 million for operating expenses. Another
fraudulent activity included improperly capitalizing a variety of expenses. This would defer expenses
paid on the books. The company also used geography entries to move millions of dollars between
the various line items on their income statement. Ultimately, the company had false profits moving
into retained earnings, false assets, and no increase in liabilities on their financial statements. In
1998, Waste Management, Inc. restated its 1992-1997 earnings by $1.7 billion, which made it the
largest restatement in history. This created the Waste Management, Inc. 1998 fraud scandal as it is
known today.
The reason why the Waste Management, Inc. 1998 scandal occurred was in an attempt to meet
predetermined earnings targets by expanding profits and pushing down or foregoing expenses.
Revenues were not increasing as fast as they should have been. The chief officers recognized this
and began to commit fraudulent activities as aforementioned in order for their financial statements
to state what they wanted them to state. In a company such as Waste Management, Inc., officer
compensation is tied to the earnings that the company produces. If Waste Management, Inc. were
to struggle in falling short of their earnings target, it would endanger the officers of the company.
The stakeholders, in turn, looked to committing fraud in order to protect their own lives.
Compensation tied to earnings brings about a major culture of fraud in any occupational
environment. These officers had the opportunity to commit fraud within the company’s financial
statements because they were all high up in the hierarchy of the organization. The founder and
CEO, Dean Buntrock, initiated a lot of the fraud and he himself was the company’s own founder.
Buntrock, along with the other stakeholders, let greed get in the way of operating the company in
an honest and efficient manner.
Because Waste Management, Inc. was a publicly traded company, the company was required to
audit their accounting books. They hired Arthur Andersen, one of the Big Five firms, for the audit.
Arthur Andersen found errors in Waste Management, Inc.’s accounting books and would come up
with adjustments and methods in which they could be fixed; however, the Waste Management Inc.
officers refused to make those adjustments that Arthur Andersen proposed. In order for the
fraudsters to cover their tracks, the stakeholders bribed Arthur Andersen by telling them that they
would receive additional fees outside of the agreement that they originally had made. Arthur
Andersen, in turn, issued unqualified opinions in the audit report for Waste Management, Inc. and
wrote off the accounting errors over time in order to conceal the fraud. Not only was Waste
Management, Inc. committing fraud with their accounting books, but now they were also committing
illegal acts by bribing Arthur Andersen.
In fact, Arthur Andersen was not just any sort of auditing firm to the stakeholders of Waste
Management, Inc. James Koeing, who was the CFO of Waste Management, Inc., was trained at
Arthur Andersen as an auditor. Thomas Hau, who was the CAO of Waste Management, Inc., was
trained at Arthur Andersen as an auditor, was a partner there for 30 years, was the engagement
partner for the Waste Management, Inc. audit, and was the head of the Arthur Andersen audit
division for the Waste Management, Inc. account. Bruce D. Tobecksen, who was the Vice President
of Finance at Waste Management, Inc., was the audit manager of the Waste Management, Inc.
audit and others at Arthur Andersen. 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,
Inc. According to the article “Accounting Fraud Rising” by CNN Money, an SEC regulator mentioned
that “the relationship is too cozy” between Waste Management, Inc. and Arthur Anderson. According
to the article, much of the pressure that the accountants have stems from the cozy relationships
that firms have with corporate clients. The article states that, “corporations often hire accountants
and other personnel from their auditors and accountants” (Chartier). This cozy relationship between
both companies created conflicts in the auditing process of Waste Management, Inc. The
stakeholders of Waste Management, Inc. were able to get away with a lot of their fraud because of
who their auditor was, in which the relationship between both companies was very close. Arthur
Andersen ended up being fined $7 million for the entirety of the Waste Management, Inc. scandal.
As a fraud examiner on this case, there are several recommendations I would propose to Waste
Management, Inc. The first thing I would recommend would have been to hire a new Certified
Executive Officer. The current CEO was committing fraud in the company. He was committing fraud
by letting greed get in his way by tying his compensation and the company’s earnings together. As
the CEO of Waste Management, Inc., he has the ultimate authority on management there. If he was
managing the company in this way with the financial statements being misstated, a new CEO would
have greatly benefited Waste Management, Inc. This new CEO would not allow the company’s
earnings to be so intertwined with the officers’ compensation.
Another recommendation I would have would be to hire a different auditor that did not have such as
cozy relationship to the officers of Waste Management, Inc. as Arthur Andersen did. Another auditor
would have told Waste Management, Inc. what adjustments need to be made to the financial
statements, and Waste Management, Inc. would have to follow them without bribing the auditor in
any way. A computer software that traced that adjustments would have been beneficial. Constant
audit checks of the financial statements would have aided in avoiding the fraud that occurred as
well. Other internal controls should have been instituted. Another auditor would have seen several
red flags within their audit of Waste Management’s financial statements. Another auditor would have
seen that the earnings were consistently meeting the predetermined earnings target. They would
have seen that millions in expenses were written off. In addition, another auditor would have seen
that there were a lot of outdated fixed assets that Waste Management, Inc. held in their possession.
In order to eliminate the opportunity factor of fraud, other officers such as the CFO and COA that
have more direct influence on the financial statements of the company would have had to be
replaced, since they were all in on the committing of the fraud at Waste Management, Inc. In order
to prevent the fraud in terms of the incentive factor, compensation and the company’s earnings
should not have been intertwined. That is what created a culture of fraud within Waste
Management, Inc. Additionally, the attitude factor of fraud that included meeting high profits and
earnings would have to be eliminated. This would create an incentive for people working at Waste
Management, Inc. to create fraud since that attitude of earning high profits and earnings has been
instilled in their minds. With it eliminated, people at Waste Management, Inc. would be opposed to
creating any sort of fraud.