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Fraud at Waste Management

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Fraud at Waste Management ... Dean L. Buntrock - Waste Management's founder, chairman of the Board of ... annually presented Company management with what it ... – PowerPoint PPT presentation

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Title: Fraud at Waste Management


1
Fraud at Waste Management
2
(No Transcript)
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.

4
When
  • 1992 to 1997 the former executives cooked the
    company's books to meet predetermined earnings
    targets.

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

6
How was the Fraud perpetrated? (contd)
  • 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 

7
How was the Fraud perpetrated? (contd)
  • 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."

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 1992-1997
    earnings by 1.7 billion, the largest restatement
    in corporate history (as of March 2002).

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.

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. (CNN.com europe
    1/11/2002)
  • Andersen helped perpetrate the scheme,
    identifying 32 "must-do" steps to cover it up

11
Andersens 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.

12
Andersens Involvement (contd)
  • 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.

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.

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.

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.

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.

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.

18
How Much Was Taken?
19
How Compensation Compares
  • Execs had less incentive to secure the future
  • Why the shift?
  • Avoid corporate looting
  • Conform to the status quo

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."

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.

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.

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.

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

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.
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