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

© 2003, 2005 by the AICPA© 2003, 2005 by the AICPA

Fraud at Waste Fraud at Waste ManagementManagement

This presentation, based upon SEC Litigation release no. 17435, AAER no. 1532 and SEC Press release 2002-44, is This presentation, based upon SEC Litigation release no. 17435, AAER no. 1532 and SEC Press release 2002-44, is intended for use in higher education for instructional purposes only, and is not for application in practice. Permission is intended for use in higher education for instructional purposes only, and is not for application in practice. Permission is granted to classroom instructors to photocopy this document for classroom teaching purposes only. All other rights are granted to classroom instructors to photocopy this document for classroom teaching purposes only. All other rights are reserved. Copyright © 2003, 2005 by the American Institute of Certified Public Accountants, Inc., New York, New reserved. Copyright © 2003, 2005 by the American Institute of Certified Public Accountants, Inc., New York, New York.York.


Who Was Involved?Who Was Involved?

Dean L. BuntrockDean L. Buntrock - Waste Management's founder, - Waste Management's founder, chairman of the Board of Directors, and chief executive chairman of the Board of Directors, and chief executive officer during most of the relevant period; officer during most of the relevant period; Phillip B. Rooney -Phillip B. Rooney - president and chief operating president and chief operating officer, director, and CEO for a portion of the relevant officer, director, and CEO for a portion of the relevant period; period; James E. Koenig -James E. Koenig - executive vice president and chief executive vice president and chief financial officer; financial officer; Thomas C. HauThomas C. Hau - vice president, corporate controller, - vice president, corporate controller, and chief accounting officer; and chief accounting officer; Herbert Getz -Herbert Getz - senior vice president, general counsel, senior vice president, general counsel, and secretary; and and secretary; and Bruce D. TobecksenBruce D. Tobecksen - vice president of finance. - vice president of finance.


WhenWhen

1992 to 1997 – the former executives cooked 1992 to 1997 – the former executives cooked the company's books to meet predetermined the company's books to meet predetermined earnings targets. earnings targets.


How was the Fraud perpetrated?How was the Fraud perpetrated?

Refused to record expenses necessary to write off the Refused to record expenses necessary to write off the costs of unsuccessful and abandoned landfill costs of unsuccessful and abandoned landfill development projects development projects Established inflated environmental reserves (liabilities) in Established inflated environmental reserves (liabilities) in connection with acquisitions so that the excess reserves connection with acquisitions so that the excess reserves could be used to avoid recording unrelated operating could be used to avoid recording unrelated operating expensesexpenses Improperly capitalized a variety of expenses Improperly capitalized a variety of expenses Failed to establish sufficient reserves (liabilities) to pay Failed to establish sufficient reserves (liabilities) to pay for income taxes and other expenses for income taxes and other expenses


How was the Fraud perpetrated? (cont’d)How was the Fraud perpetrated? (cont’d)

The Company's revenues and profits were not growing fast The Company's revenues and profits were not growing fast enough to meet targets, so management inflated enough to meet targets, so management inflated earnings by improperly eliminating and deferring current earnings by improperly eliminating and deferring current period expenses. Employing a multitude of improper period expenses. Employing a multitude of improper accounting practices to achieve this objective, accounting practices to achieve this objective, management:management:

Avoided depreciation expenses on their garbage trucks Avoided depreciation expenses on their garbage trucks by both assigning unsupported and inflated salvage by both assigning unsupported and inflated salvage values and extending their useful livesvalues and extending their useful lives

Assigned arbitrary salvage values to other assets that Assigned arbitrary salvage values to other assets that previously had no salvage value previously had no salvage value

Failed to record expenses for decreases in the value of Failed to record expenses for decreases in the value of landfills as they were filled with wastelandfills as they were filled with waste


How was the Fraud perpetrated? (cont’d)How was the Fraud perpetrated? (cont’d)

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


How was the fraud uncovered?How was the fraud uncovered?

The scheme unraveled in mid-1997, after a The scheme unraveled in mid-1997, after a new CEO ordered a review of the company's new CEO ordered a review of the company's accounting practices. accounting practices.

In 1998, Waste Management restated its 1992-In 1998, Waste Management restated its 1992-1997 earnings by $1.7 billion, the largest 1997 earnings by $1.7 billion, the largest restatement in corporate history (as of March restatement in corporate history (as of March 2002).2002).


Where were the auditors?Where were the auditors?

The trash hauler had been one of Andersen's The trash hauler had been one of Andersen's biggest clients and had stuck with the firm as biggest clients and had stuck with the firm as Waste Management's own accounting scandal Waste Management's own accounting scandal emerged several years ago. emerged several years ago.

Andersen was fined $7 million by the SEC in Andersen was fined $7 million by the SEC in connection with the Waste Management audits, connection with the Waste Management audits, in what regulators said was the largest fine ever in what regulators said was the largest fine ever paid by a Big Five firm in an enforcement action paid by a Big Five firm in an enforcement action brought by the SEC. Three audit partners were brought by the SEC. Three audit partners were fined individually.fined individually.


Cozy RelationshipsCozy Relationships

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


Andersen’s InvolvementAndersen’s Involvement

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


Andersen’s Involvement (cont’d)Andersen’s Involvement (cont’d)

Management consistently refused to make Management consistently refused to make the adjustments called for by the PAJEs. the adjustments called for by the PAJEs. Instead, Waste Management secretly Instead, Waste Management secretly entered into an agreement with Andersen entered into an agreement with Andersen fraudulently to write off the accumulated fraudulently to write off the accumulated errors over periods of up to ten years.errors over periods of up to ten years.WM agreed to change the underlying WM agreed to change the underlying accounting practices, but would only do so accounting practices, but would only do so in future periods. in future periods.


Why Was This Fraud So Important?Why Was This Fraud So Important?

Some believe that Andersen would have Some believe that Andersen would have survived Enron if not for the blatant acts at survived Enron if not for the blatant acts at Waste Management.Waste Management.

The WSJ stated in an article that the The WSJ stated in an article that the Waste Management scandal stood out Waste Management scandal stood out among the numerous accounting scandals among the numerous accounting scandals breaking in the news.breaking in the news.


The Fraudsters’ schemeThe Fraudsters’ scheme

To reduce expenses and inflate earnings To reduce expenses and inflate earnings artificially, management primarily used "top-level artificially, management primarily used "top-level adjustments" to conform the company's actual adjustments" to conform the company's actual results to the predetermined earnings targets. results to the predetermined earnings targets.

The inflated earnings of prior periods then The inflated earnings of prior periods then became the floor for future manipulations. The became the floor for future manipulations. The consequences created what Hau referred to as a consequences created what Hau referred to as a "one-off" problem. To sustain the scheme, "one-off" problem. To sustain the scheme, earnings fraudulently achieved in one period had earnings fraudulently achieved in one period had to be replaced in the next. to be replaced in the next.


How did Management fare?How did Management fare?

Management profited handsomely from Management profited handsomely from their fraud, receiving performance-based their fraud, receiving performance-based bonuses based on the Company's inflated bonuses based on the Company's inflated earnings, retaining their high-paying jobs, earnings, retaining their high-paying jobs, and receiving stock options. Some also and receiving stock options. Some also received enhanced retirement benefits received enhanced retirement benefits based on the improper bonuses and/or based on the improper bonuses and/or lucrative employment contracts. lucrative employment contracts.


Cashing InCashing In

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


Who Was Hurt?Who Was Hurt?

Waste Management's Waste Management's shareholders (other than shareholders (other than the defendants who sold the defendants who sold Company stock and thus Company stock and thus avoided losses) lost over avoided losses) lost over $6 billion in the market $6 billion in the market value of their investments value of their investments when the stock price when the stock price plummeted by more than plummeted by more than 33%. 33%.


How Much Was Taken?How Much Was Taken?

$0$2,000,000$4,000,000$6,000,000$8,000,000

$10,000,000$12,000,000$14,000,000$16,000,000$18,000,000

Buntrock $16,917,761

Rooney $9,286,124

Koenig $951,005

Hau $640,100

Getz $472,500

Tobecksen $403,779


How Compensation ComparesHow Compensation Compares

Execs had less incentive to secure the future Execs had less incentive to secure the future

Why the shift?Why the shift?– Avoid corporate lootingAvoid corporate looting– Conform to the status quoConform to the status quo

Comparative CEO CompensationComparative CEO Compensation

Non-Performance Non-Performance PerformancePerformance

20012001 19961996 20012001 19961996

Waste ManagementWaste Management 6.08% 18.17% 93.92% 81.83%

Allied WasteAllied Waste 12.00% 7.27% 88.00% 92.73%

DifferenceDifference 5.92% 10.90% 5.92% 10.90%


SEC ReactionSEC Reaction

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


The Web of Deceit - BuntrockThe Web of Deceit - Buntrock

Buntrock was the driving force behind the Buntrock was the driving force behind the fraud. fraud.

He set earnings targets, fostered a culture of He set earnings targets, fostered a culture of aggressive accounting, personally directed aggressive accounting, personally directed certain of the accounting changes to make the certain of the accounting changes to make the targeted earnings, and was the spokesperson targeted earnings, and was the spokesperson who announced the Company's phony who announced the Company's phony numbers. numbers.


The Web of Deceit - RooneyThe Web of Deceit - Rooney

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


The Web of Deceit - KoenigThe Web of Deceit - Koenig

Koenig had primary responsibility for Koenig had primary responsibility for executing the scheme. executing the scheme.

He also ordered the destruction of He also ordered the destruction of damaging evidence, misled the damaging evidence, misled the Company's audit committee and internal Company's audit committee and internal accountants, and withheld information accountants, and withheld information from the outside auditors. from the outside auditors.


The Web of Deceit - HauThe Web of Deceit - Hau

Hau was the accounting expert who, Hau was the accounting expert who, among other things, devised many "one-among other things, devised many "one-off" accounting manipulations to deliver off" accounting manipulations to deliver the targeted earnings and carefully crafted the targeted earnings and carefully crafted the deceptive disclosures. the deceptive disclosures.

He profited by more than He profited by more than $600,000$600,000 from from his fraudulent actshis fraudulent acts


The Web of Deceit The Web of Deceit

Tobecksen, another accounting expert, Tobecksen, another accounting expert, was enlisted in 1994 to handle Hau's was enlisted in 1994 to handle Hau's overflow. overflow.

Getz, the general counsel, blessed the Getz, the general counsel, blessed the Company's fraudulent disclosures. Company's fraudulent disclosures.

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

Documents

variety of expenses

expenses necessary

current period expenses

unrelated operating

waste slide

waste management slide

aicpa fraud

avoided depreciation