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Fraud at Waste Management

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Presentation on theme: "Fraud at Waste Management"— Presentation transcript:

1 Fraud at Waste Management
© 2003, 2005 by the AICPA


3 Who Was Involved? Dean L. Buntrock - Waste Management's founder, chairman of the Board of Directors, and chief executive officer during most of the relevant period; Phillip B. Rooney - 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. © 2003, 2005 by the AICPA

4 When 1992 to 1997 – the former executives cooked the company's books to meet predetermined earnings targets. © 2003, 2005 by the AICPA

5 How was the Fraud perpetrated?
Refused to record expenses necessary to write off the costs of unsuccessful and abandoned landfill development projects   Established inflated environmental reserves (liabilities) in connection with acquisitions so that the excess reserves could be used to avoid recording unrelated operating expenses   Improperly capitalized a variety of expenses   Failed to establish sufficient reserves (liabilities) to pay for income taxes and other expenses © 2003, 2005 by the AICPA

6 How was the Fraud perpetrated? (cont’d)
The Company's revenues and profits were not growing fast enough to meet targets, so management inflated earnings by improperly eliminating and deferring current period expenses. Employing a multitude of improper accounting practices to achieve this objective, management: Avoided depreciation expenses on their garbage trucks by both assigning unsupported and inflated salvage values and extending their useful lives Assigned arbitrary salvage values to other assets that previously had no salvage value  Failed to record expenses for decreases in the value of landfills as they were filled with waste  © 2003, 2005 by the AICPA

7 How was the Fraud perpetrated? (cont’d)
Waste Management used netting to eliminate approximately $490 million in current period operating expenses and accumulated prior period accounting misstatements by offsetting them against unrelated one-time gains on the sale or exchange of assets. They used geography entries to move tens of millions of dollars between various line items on the Company's income statement to, in Koenig's words, "make the financials look the way we want to show them." © 2003, 2005 by the AICPA

8 How was the fraud uncovered?
The scheme unraveled in mid-1997, after a new CEO ordered a review of the company's accounting practices. In 1998, Waste Management restated its earnings by $1.7 billion, the largest restatement in corporate history (as of March 2002). © 2003, 2005 by the AICPA

9 Where were the auditors?
The trash hauler had been one of Andersen's biggest clients and had stuck with the firm as Waste Management's own accounting scandal emerged several years ago. Andersen was fined $7 million by the SEC in connection with the Waste Management audits, in what regulators said was the largest fine ever paid by a Big Five firm in an enforcement action brought by the SEC. Three audit partners were fined individually. © 2003, 2005 by the AICPA

10 Cozy Relationships "I think for all the relevant periods, the chief accounting officers at Waste Management came from Arthur Andersen," said one SEC regulator. "The relationship is too cozy.“ ( europe 1/11/2002) Andersen helped perpetrate the scheme, identifying 32 "must-do" steps to cover it up © 2003, 2005 by the AICPA

11 Andersen’s Involvement
Management capped Andersen's audit fees and advised Andersen that the firm could earn additional fees through "special work.” Andersen identified Waste Management's improper accounting practices and quantified much of the impact of those practices on the company's financial statements. Andersen annually presented Company management with what it called Proposed Adjusting Journal Entries ("PAJEs") to correct errors that understated expenses and overstated earnings in the Company's financial statements. © 2003, 2005 by the AICPA

12 Andersen’s Involvement (cont’d)
Management consistently refused to make the adjustments called for by the PAJEs. Instead, Waste Management secretly entered into an agreement with Andersen fraudulently to write off the accumulated errors over periods of up to ten years. WM agreed to change the underlying accounting practices, but would only do so in future periods. © 2003, 2005 by the AICPA

13 Why Was This Fraud So Important?
Some believe that Andersen would have survived Enron if not for the blatant acts at Waste Management. The WSJ stated in an article that the Waste Management scandal stood out among the numerous accounting scandals breaking in the news. © 2003, 2005 by the AICPA

14 The Fraudsters’ scheme
To reduce expenses and inflate earnings artificially, management primarily used "top-level adjustments" to conform the company's actual results to the predetermined earnings targets. The inflated earnings of prior periods then became the floor for future manipulations. The consequences created what Hau referred to as a "one-off" problem. To sustain the scheme, earnings fraudulently achieved in one period had to be replaced in the next. © 2003, 2005 by the AICPA

15 How did Management fare?
Management profited handsomely from their fraud, receiving performance-based bonuses based on the Company's inflated earnings, retaining their high-paying jobs, and receiving stock options. Some also received enhanced retirement benefits based on the improper bonuses and/or lucrative employment contracts. © 2003, 2005 by the AICPA

16 Cashing In Buntrock, Rooney, and Koenig avoided losses by cashing in their Waste Management stock while the fraud was ongoing. For example, just ten days before certain of the accounting irregularities first became public, Buntrock enriched himself with a tax benefit by donating inflated Company stock to his college alma mater to fund a building in his name. © 2003, 2005 by the AICPA

17 Who Was Hurt? Waste Management's shareholders (other than the defendants who sold Company stock and thus avoided losses) lost over $6 billion in the market value of their investments when the stock price plummeted by more than 33%. © 2003, 2005 by the AICPA

18 How Much Was Taken? © 2003, 2005 by the AICPA

19 How Compensation Compares
Comparative CEO Compensation Non-Performance Performance 2001 1996 Waste Management 6.08% 18.17% 93.92% 81.83% Allied Waste 12.00% 7.27% 88.00% 92.73% Difference 5.92% 10.90% Execs had less incentive to secure the future Why the shift? Avoid corporate looting Conform to the status quo How does compensation compare with our benchmark (Allied Waste)? Interestingly enough,non-performance compensation was overweighted for Waste Management. The overweight has since been reversed. One possible explanation for the shift is that Waste Management felt that too low of performance-based compensation lead to corporate looting; they felt there wasn’t enough incentive to look out for the long term interest of the corporation. Other possible explanations are a desire to conform to the status quo, larger performance based interests in prior/subsequent years, etc. It is also possible that we missed a number in the proxy reports. We at least know there was (and still is) an difference in compensation structures that might have been a fraud motivator. © 2003, 2005 by the AICPA

20 SEC Reaction "Our complaint describes one of the most egregious accounting frauds we have seen," said Thomas C. Newkirk, associate director of the SEC's Division of Enforcement. "For years, these defendants cooked the books, enriched themselves, preserved their jobs, and duped unsuspecting shareholders." © 2003, 2005 by the AICPA

21 The Web of Deceit - Buntrock
Buntrock was the driving force behind the fraud. He set earnings targets, fostered a culture of aggressive accounting, personally directed certain of the accounting changes to make the targeted earnings, and was the spokesperson who announced the Company's phony numbers. © 2003, 2005 by the AICPA

22 The Web of Deceit - Rooney
Rooney was in charge of building the profitability of the Company's core solid waste operations and at all times exercised overall control over the Company's largest subsidiary. He ensured that required write-offs were not recorded and, in some instances, overruled accounting decisions that would have a negative impact on operations. © 2003, 2005 by the AICPA

23 The Web of Deceit - Koenig
Koenig had primary responsibility for executing the scheme. He also ordered the destruction of damaging evidence, misled the Company's audit committee and internal accountants, and withheld information from the outside auditors. © 2003, 2005 by the AICPA

24 The Web of Deceit - Hau Hau was the accounting expert who, among other things, devised many "one-off" accounting manipulations to deliver the targeted earnings and carefully crafted the deceptive disclosures. He profited by more than $600,000 from his fraudulent acts © 2003, 2005 by the AICPA

25 The Web of Deceit Tobecksen, another accounting expert, was enlisted in 1994 to handle Hau's overflow. Getz, the general counsel, blessed the Company's fraudulent disclosures. © 2003, 2005 by the AICPA

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