Waste Management, Inc., founded in 1894, offers environmental services to nearly 20 million residential, industrial, commercial, and municipal customers in the US, Canada, and Puerto Rico. With a large customer base, it is difficult to picture such a large company committing fraud. However, between the years of 1992 and 1997, several chief officers in the company engaged in a systematic scheme to falsify and misrepresent Waste Management’s financial results. Heading the Company was Dean L. Buntrock, Waste Management’s founder, Chairman of the Board of Directors, and Chief Executive Officer for most of the relevant period. He set earnings targets and cultivated an atmosphere of fraudulent accounting to make the earnings. Buntrock, along with Phillip B. Rooney, the President and Chief Operating Officer, Director, and CEO for a portion of the relevant period; James E. Koenig, Executive Vice President and Chief Financial Officer; Thomas C. Hau, Vice President, Corporate Controller, and Chief Accounting Officer; Herbert Getz, Senior Vice President, General Counsel, and Secretary; and Bruce D. Tobecksen, Vice President of Finance misstated pre-tax earnings by approximately $1.7 billion during the timeframe of the fraud. The management team each benefited hundreds of thousands of dollars from the scheme (See Appendix 1). As the revenues of the company were not growing fast enough, the top officers eliminated and deferred current period expenses to inflate earnings. They assigned incorrect and inflated salvage value on their trucks while extending their useful lives to avoid depreciation expenses. Once landfills were filled with waste, they failed to record expenses for decreases in value. They gave random, unsupported salvage values to assets that previously had no salvage value. Unsuccessful and abandoned landfill development projects were not recorded as expenses or write-offs. Along with the top officers, the company’s longtime auditor, Arthur Andersen LLP, provided clean audit reports on the company’s materially false and misleading annual financial statements. The auditing company was fined $7 million for their role in the fraud. The scheme included manipulating the company’s financial results to meet the earnings targets set by Buntrock. SUGGESTIONS FOR AUDIT FIRM
Arthur Andersen paid $229 million to Waste Management shareholders and $7 million to the SEC for assisting in the audit scandal. If Arthur Andersen had implemented proper procedures to check deprecation practices and relied less heavily on fees from “other services,” and assessed Waste Managements’ internal controls the audit firm could have avoided what the SEC refers to as “one of the most egregious accounting frauds [ever] seen.” Waste Management’s fixed assets, which consisted of garbage trucks, containers, and equipment, were valued at $6 billion. Under GAAP, depreciation should be calculated as, Historical Cost – Salvage Value / Estimated Useful Life of Asset The Company made numerous changes to the estimated useful life and the salvage value, which reduced depreciation expense. Despite Andersen suggesting that the management team conduct a study to evaluate the proper salvage values and useful lives, management made the unsupported changes at head quarters. Andersen should have followed up to see that the request was put into place. Additionally, the Company’s second largest asset was land, which included over 100 fully operational landfills. GAAP required Waste Managements’ landfills to be depreciated. Although the Financial Statements’ footnotes disclosed that landfills were carried at “cost and to the extent this exceeds end use realizable value,” the SEC later discovered almost all the landfills were carried at cost. Andersen needed to be more cautious and observant in checking Waste Management’s depreciation methods. Changes to the salvage value or estimated life of an asset should be supported by evidence from an...
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