Waste Management, Inc., incorporated in 1968, had become a leader in the industry of waste management services ranging from industrial operations to curbside collection. This company had become synonymous with many different kinds of disposal services that allowed for the company to grow and grow with a solid base over the course of twenty-eight years. Finally in 1996, the company reported total assets of almost $20 billion with net income close to $200 million. However, even with this growth and solid base, the company was feeling competitive pressures and net income was on the decline.
Everyone from local to national collection companies were now charging less to the customer and this was taking a major toll on the gross margins and net income of Waste Management. With a balance sheet that was heavily based on equipment and land Waste Management was beginning to see that the only way to keep the company growing was to use depreciation and salvage value manipulation to lower the direct hits of these expenses.
Now that the issues were becoming large enough to notice, the SEC began stepping in to investigate the operations, assets and accounting methods that were being used. Due to this, the company issued a release saying they would be amending and restating certain periods of their reporting and issuing new form 10-Ks and 10-Qs. Once the restatement occurred and a $3.5 billion dollar loss was found the company’s incorrect accounting processes were finally exposed. This resulted in net losses for the company as well as debt and equity ratings dropping precipitously.
The SEC now launched a formal investigation into the accounting processes and found many misstatements from avoiding depreciation to improper capitalization and failure to accrue to proper liabilities. Many techniques were used and the end result was that many of the management team’s members were named as defendants in this case as it was seen that they were the ones who were primarily responsible for the execution of this fraud.
Through the investigation, it was found that Arthur Andersen helped to keep the fraud going by not demanding that PAJEs be undertaken to correct errors. Instead, Arthur Andersen, who viewed Waste Management as their “jewel” client, entered into an agreement with Waste Mangement to fix these errors in coming years. This constituted an agreement to cover up fraud and Andersen was then sued for civil fraud by the SEC that carried a heavy price.
The company stock plunged and Arthur Andersen’s partners were fined and banned from the auditing of public companies for up to five years. This overall lack of internal control and greed in the company ultimately led to a downfall for many partners and managing members at both Andersen and Waste Management.
1) Three conditions are often present when fraud exists. First, management or employees have an incentive or are under pressure, which provides them a reason to commit the fraud act. Second, circumstances exist – for example, absent or ineffective internal controls or the ability for management to override controls – that provide an opportunity for the fraud to be perpetrated. Third, those involved are able to rationalize the fraud as being consistent with their personal code of ethics. Some individuals possess an attitude, character, or set of ethical values that allows them to knowingly commit a fraudulent act. Using hindsight, identify factors present at Waste Management that are indicative of each of the three fraud conditions: incentives, opportunities, and attitudes. Incentive
Management teams of publicly traded companies are always under enormous pressure from shareholders to meet and exceed earnings expectations. Many shareholders view year over year growth, and performance vs. earnings as a sign of health of the company they’ve invested in. The pressure on management teams is compounded when poor...