Waste Management Case Study
April 24, 2010
Ace Scavenger Service began its journey as a small, family owned trash hauling business in 1894. The family business was passed to Dean Buntrock in 1956. Buntrock had the foresight to begin consolidating small trash companies into one large company. He started with the merger of his firm with two other smaller firms in 1968 and created Waste Management, Inc. In 1971, Waste Management, Inc. had its initial public offering and used those proceeds, and some questionable business practices, to take over their competitors. It was a great time to be in the garbage business as throwaway items and containers began to become more and more common and the trash business was also beginning to deal with environmental issues, such as chemical and toxic waste treatment. During their major growth period during the 1970’s, Waste Management, Inc. hired Arthur Andersen to design and install a centralized computer network that would provide them with detailed information about their nationwide operations. What went wrong is a story of improper accounting practices and the issuance of unqualified financial statements by auditors who knew they were fraudulent, but chose to issue them anyway.
The business model of Dean Buntrock and his contemporaries was to use an aggressive management style and purchase smaller companies through illegal trade practices, such as price fixing, bid rigging, bribery, illegal campaign contributions and physical intimidation when necessary. Buntrock and the other heads of Waste Management, Inc. preferred to do whatever they felt was necessary to accomplish an objective and worry about the consequences, if any, when they happened. Waste Management often escaped blame for illegal acts by claiming that the various heads of smaller acquired companies performed the illegal acts without the knowledge or consent of upper management. This style of management was reflected by their accounting practice of fourth quarter adjustments to make the financial statements appear the way they wanted them to look.
Management Style – Solutions:
The only solution to the aggressive style of Dean Buntrock and his peers was to remove them from power at Waste Management, Inc. This happened in 1996 when Nell Minow, a corporate raider and turnaround specialist, took aim at Waste Management and forced Dean Buntrock to retire as CEO. Slowly, the remainder of the Board of Directors was replaced and by 1998, the Audit Committee for Waste Management hired Ernst & Young to investigate the accounting practices. It was at this point that the financial statements for 1993 through 1997 were restated.
External Auditor - Issues:
Arthur Anderson had been the auditing firm for Waste Management, Inc. since before its initial public offering and “Until 1997, every chief financial officer (“CFO”) and chief accounting office (“CAO”) in Waste Management’s history as a public company had previously worked as an auditor at Andersen”. (SanDiego DA report). Since the major players in the accounting division of Waste Management came from Arthur Andersen, they knew how to manipulate the books to create the profits they wanted to show as well as how to manipulate the Arthur Andersen auditing team into overlooking these adjustments.
As Waste Management, Inc. grew in size, it began to feel the pressures of a publicly traded corporation. It had to meet Wall Street expectations; keeping its profits high and its stock prices increasing. As a result, Dean Buntrock and his financial managers began using some very aggressive accounting practices, such as overstating the “goodwill” from the purchase of new companies, understating the depreciation of their equipment, not properly accounting for future cleanup costs of companies which they acquired, non-GAAP capitalization of interest on landfill development and other questionable practices.
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References: American Institute of Certified Public Accountants. AU Section 150 - Generally Accepted Auditing Standards. Retrieved April 24, 2010, from, http://www.aicpa.org/download/members/div/auditstd/au-00150.pdf
Business World. Capital View. July 22, 2009 by Mercedes B. Suleik. Retrieved April 24, 2010, from ProQuest Newsstand. (Document ID: 1799107131)
Clikeman, Paul M. (2009). Waste Management. In Called to account fourteen financial frauds that shaped the American accounting profession (pp. 204-212). New York: Routledge.
Daily Herald.Mike Comerford Daily Herald Business Writer. Daily Herald August 30, 2005. ProQuest Newsstand.
Siegel, Joel G, Levine, Marc H., Qureshi, Anique A., Shim, Jae K. (2010). Balance Sheet Reporting and Disclosures: Assets. In GAAP 2010 Handbook of Policies and Procedures (pp. 3.74 – 3.80).
U.S. Securities and Exchange Commission. Waste management Founder, Five Other Former Top Officers Sued for Massive Fraud. 2002-44. http://www.sec.gov/news/headlines/wastemgmt6.htm
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