waste management scandal case study

The Waste Management, Inc. 1998 Fraud Scandal

Waste Management, Inc. is a comprehensive waste company that was founded in 1894 in North America by Larry Beck. The company went public in 1971 and by 1972, the company was generating about $82 million in revenue and had made 133 acquisitions. The company offered environmental services to almost 20 million customers in America, Canada, and Puerto Rico. In the years of the 1980s, Waste Management, Inc. acquired Service Corporation of America, which led Waste Management, Inc. to become the largest waste management and environmental services company in the country. It was able to manage millions of tons of materials in many different facilities.

Waste Management, Inc. experienced many fraudulent crimes within its company between the years of 1992 and 1997. The senior officers at Waste Management, Inc., which included Dean Buntrock (Founder and CEO), Phillip Rooney (Former President), Thomas Hau (CAO), James Koenig (CFO), Herbert Getz (General Counsel), and Bruce Tobecksen (Vice President of Finance), began to engage in fraudulent activities involving the company’s accounting books. One of the fraud activities that occurred was avoiding depreciation expenses by assigning and inflating salvage values and extending the useful lives of the garbage trucks that the company owned. Every year, depreciation expense must be included in a company’s financial statements as the assets owned become used up and do not have the same value as it originally had. Moreover, another fraudulent activity that occurred with the accounting books was how the officers were refraining from recording expenses for any decreases in the value of the landfills. By doing this, it would state less expenses for the company, when in reality, there should have been more added for this. Next, the officers also refused to record necessary expenses to write off the costs of unsuccessful and discarded landfill development projects. This, in turn, stated less expenses on the company’s financial statements. In addition, the officers assigned salvage values to assets that previously had no salvage values whatsoever. In other words, this would extend the residual value of an asset that originally did not have any. Waste Management, Inc. also increased environmental reserves to avoid irrelevant operating expenses. Netting helped eliminate about $490 million for operating expenses. Another fraudulent activity included improperly capitalizing a variety of expenses. This would defer expenses paid on the books. The company also used geography entries to move millions of dollars between the various line items on their income statement. Ultimately, the company had false profits moving into retained earnings, false assets, and no increase in liabilities on their financial statements. In 1998, Waste Management, Inc. restated its 1992-1997 earnings by $1.7 billion, which made it the largest restatement in history. This created the Waste Management, Inc. 1998 fraud scandal as it is known today.

The reason why the Waste Management, Inc. 1998 scandal occurred was in an attempt to meet predetermined earnings targets by expanding profits and pushing down or foregoing expenses. Revenues were not increasing as fast as they should have been. The chief officers recognized this and began to commit fraudulent activities as aforementioned in order for their financial statements to state what they wanted them to state. In a company such as Waste Management, Inc., officer compensation is tied to the earnings that the company produces. If Waste Management, Inc. were to struggle in falling short of their earnings target, it would endanger the officers of the company. The stakeholders, in turn, looked to committing fraud in order to protect their own lives. Compensation tied to earnings brings about a major culture of fraud in any occupational environment. These officers had the opportunity to commit fraud within the company’s financial statements because they were all high up in the hierarchy of the organization. The founder and CEO, Dean Buntrock, initiated a lot of the fraud and he himself was the company’s own founder. Buntrock, along with the other stakeholders, let greed get in the way of operating the company in an honest and efficient manner.

Because Waste Management, Inc. was a publicly traded company, the company was required to audit their accounting books. They hired Arthur Andersen, one of the Big Five firms, for the audit. Arthur Andersen found errors in Waste Management, Inc.’s accounting books and would come up with adjustments and methods in which they could be fixed; however, the Waste Management Inc. officers refused to make those adjustments that Arthur Andersen proposed. In order for the fraudsters to cover their tracks, the stakeholders bribed Arthur Andersen by telling them that they would receive additional fees outside of the agreement that they originally had made. Arthur Andersen, in turn, issued unqualified opinions in the audit report for Waste Management, Inc. and wrote off the accounting errors over time in order to conceal the fraud. Not only was Waste Management, Inc. committing fraud with their accounting books, but now they were also committing illegal acts by bribing Arthur Andersen.

In fact, Arthur Andersen was not just any sort of auditing firm to the stakeholders of Waste Management, Inc. James Koeing, who was the CFO of Waste Management, Inc., was trained at Arthur Andersen as an auditor. Thomas Hau, who was the CAO of Waste Management, Inc., was trained at Arthur Andersen as an auditor, was a partner there for 30 years, was the engagement partner for the Waste Management, Inc. audit, and was the head of the Arthur Andersen audit division for the Waste Management, Inc. account. Bruce D. Tobecksen, who was the Vice President of Finance at Waste Management, Inc., was the audit manager of the Waste Management, Inc. audit and others at Arthur Andersen. These important chief officers at Waste Management, Inc. all came from Arthur Andersen, who was the company in charge of the audit of Waste Management, Inc. According to the article “Accounting Fraud Rising” by CNN Money, an SEC regulator mentioned that “the relationship is too cozy” between Waste Management, Inc. and Arthur Anderson. According to the article, much of the pressure that the accountants have stems from the cozy relationships that firms have with corporate clients. The article states that, “corporations often hire accountants and other personnel from their auditors and accountants” (Chartier). This cozy relationship between both companies created conflicts in the auditing process of Waste Management, Inc. The stakeholders of Waste Management, Inc. were able to get away with a lot of their fraud because of who their auditor was, in which the relationship between both companies was very close. Arthur Andersen ended up being fined $7 million for the entirety of the Waste Management, Inc. scandal.

As a fraud examiner on this case, there are several recommendations I would propose to Waste Management, Inc. The first thing I would recommend would have been to hire a new Certified Executive Officer. The current CEO was committing fraud in the company. He was committing fraud by letting greed get in his way by tying his compensation and the company’s earnings together. As the CEO of Waste Management, Inc., he has the ultimate authority on management there. If he was managing the company in this way with the financial statements being misstated, a new CEO would have greatly benefited Waste Management, Inc. This new CEO would not allow the company’s earnings to be so intertwined with the officers’ compensation.

Another recommendation I would have would be to hire a different auditor that did not have such as cozy relationship to the officers of Waste Management, Inc. as Arthur Andersen did. Another auditor would have told Waste Management, Inc. what adjustments need to be made to the financial statements, and Waste Management, Inc. would have to follow them without bribing the auditor in any way. A computer software that traced that adjustments would have been beneficial. Constant audit checks of the financial statements would have aided in avoiding the fraud that occurred as well. Other internal controls should have been instituted. Another auditor would have seen several red flags within their audit of Waste Management’s financial statements. Another auditor would have seen that the earnings were consistently meeting the predetermined earnings target. They would have seen that millions in expenses were written off. In addition, another auditor would have seen that there were a lot of outdated fixed assets that Waste Management, Inc. held in their possession.

In order to eliminate the opportunity factor of fraud, other officers such as the CFO and COA that have more direct influence on the financial statements of the company would have had to be replaced, since they were all in on the committing of the fraud at Waste Management, Inc. In order to prevent the fraud in terms of the incentive factor, compensation and the company’s earnings should not have been intertwined. That is what created a culture of fraud within Waste Management, Inc. Additionally, the attitude factor of fraud that included meeting high profits and earnings would have to be eliminated. This would create an incentive for people working at Waste Management, Inc. to create fraud since that attitude of earning high profits and earnings has been instilled in their minds. With it eliminated, people at Waste Management, Inc. would be opposed to creating any sort of fraud.

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Dean L. Buntrock, Phillip B. Rooney, James E. Koenig, Thomas C. Hau, Herbert A. Getz, and Bruce D. Tobecksen

U.s. securities and exchange commission, litigation release no. 19351 / august 29, 2005, accounting and auditing enforcement release no. 2298 / august 29, 2005, securities and exchange commission v. dean l. buntrock, phillip b. rooney, james e. koenig, thomas c. hau, herbert a. getz, and bruce d. tobecksen, civil action no. 02 c 2180 (n.d. ill.) (judge andersen)., waste management, inc. founder and three other former top officers settle sec fraud action for $30.8 million.

The Securities and Exchange Commission announced today that, on August 26, 2005, the United States District Court for the Northern District of Illinois entered final judgments as to defendants Dean L. Buntrock, Phillip B. Rooney, Thomas C. Hau, and Herbert A. Getz. The settling defendants, who consented to the Judgments without admitting or denying the allegations in the Commission's complaint, were senior officers of Waste Management, Inc.: Dean L. Buntrock was Waste Management's founder, chairman of the Board of Directors, and chief executive officer during most of the relevant period; Phillip B. Rooney was president and chief operating officer, director, and CEO for a portion of the relevant period; Thomas C. Hau was vice president, corporate controller, and chief accounting officer; and Herbert Getz was senior vice president, general counsel, and secretary. The Judgments permanently bar Buntrock, Rooney, Hau, and Getz from acting as an officer or director of a public company, enjoin them from future violations of the antifraud and other provisions of the federal securities laws, and require payment of $30,869,054 in disgorgement, prejudgment interest, and civil penalties.

The complaint in this action charged Buntrock, Rooney, Hau, Getz, and two other former top officers of Waste Management with perpetrating a massive financial fraud lasting more than five years. The Commission alleged that, beginning in 1992 and continuing into 1997, defendants engaged in a systematic scheme to falsify and misrepresent Waste Management's financial results with profits being overstated by $1.7 billion. The fraud resulted in a restatement in February 1998, which at the time was the largest restatement in history.

According to the complaint, the scheme was accomplished through false and misleading disclosures and a variety of non-GAAP accounting practices designed to defer current period expenses whenever possible. For example, the Company manipulated its calculation of depreciation expense by repeatedly extending the useful lives and overstating the salvage value of its trucks and containers, thus reducing periodic depreciation expenses. The Company also failed to write off impaired assets carried on its balance sheet, improperly capitalized interest and other current period expenses, understated its income tax expenses, under-accrued reserves, misapplied acquisition accounting principles, and improperly reversed reserves into income. All of these practices boosted current period earnings by reducing current period expenses.

The Judgments permanently bar Buntrock, Rooney, Hau, and Getz from acting as an officer or director of a public company and enjoin them from violating, or aiding and abetting violations of, Sections 10(b) and 13(a) of the Securities Exchange Act of 1934, Rules 10b-5, 12b-20, 13a-1, and 13a-13 promulgated thereunder, and Section 17(a) of the Securities Act of 1933. The Judgment as to Hau additionally enjoins him from aiding and abetting violations of Section 13(b)(2)(A) of Exchange Act, and from violating Exchange Act Rules 13b2-1 and 13b2-2.

The Judgments also require payment of over $30 million in total, comprised of $16.4 million in disgorgement, $10.4 million prejudgment interest, and $4 million in civil penalties. The disgorgement includes approximately $6.3 million in earnings-based performance bonuses from all settling defendants, $5.9 million in Buntrock and Hau's retirement benefits based upon the earnings-based bonuses, $3.5 million in losses avoided by Buntrock and Rooney from selling stock during the fraud, and $700,000 in tax benefits realized by Buntrock from gifting stock that was inflated by the fraud. The breakdown of the monetary relief is as follows:

• Buntrock - $19,447,670 total, comprised of $10,708,032 in disgorgement, $6,439,638 of prejudgment interest, and a $2,300,000 civil penalty;  
• Rooney - $8,692,738 total, comprised of $4,593,764 in disgorgement, $2,998,974 of prejudgment interest, and a $1,100,000 civil penalty;  
• Hau -$1,578,890 total, comprised of $641,866 in disgorgement, $507,024 of prejudgment interest, and a $430,000 civil penalty; and  
• Getz - $1,149,756 total, comprised of $472,500 in disgorgement, $477,256 of prejudgment interest, and a $200,000 civil penalty.  

Additionally, Getz agreed to settle a related Rule 102(e) administrative proceeding to be instituted by the Commission by consenting to the entry of an order suspending him from appearing or practicing before the Commission as an attorney for five years.

The Commission's litigation is continuing as to James E. Koenig Waste Management's former chief financial officer and executive vice president. The other senior officer named in the complaint, Bruce D. Tobecksen, settled in September 2004. [Release No. LR-18913] (September 30, 2004).

Additional information concerning this action and Commission actions related to this matter can be found at:

SEC v. Buntrock, et al., Civil Action No. 02-C-2180 (N.D. Ill. March 26, 2002) (Andersen, J.) [Release No. LR-17435] (March 26, 2002)

SEC v. Arthur Andersen LLP, et al., No. 1:01CV01348 (JR) (D.D.C.) [Release No. LR-17039] (June 19, 2001);

In the Matter of Arthur Andersen, LLP, [Release No. 34-44444] (June 19, 2001);

In the Matter of Robert E. Allgyer, CPA, [Release Nos. 33-7986, 34-44445] (June 19, 2001);

In the Matter of Edward G. Maier, CPA, [Release Nos. 33-7987, 34-44446] (June 19, 2001);

In the Matter of Walter Cercavschi, CPA, [Release Nos. 33-7988, 34-44447] (June 19, 2001);

In the Matter of Robert G. Kutsenda, CPA, [Release No. 34-44448] (June 19, 2001);

SEC v. Buntrock, et al., Civil Action No. 02-C-2180 (N.D. Ill.) (Andersen, J.) [Release No. LR-18913] (September 30, 2004).

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Ex-Officers of Waste Company Settle Case

By Bloomberg News

• Aug. 30, 2005

Four former executives at Waste Management, the world's largest trash hauler, have settled a Securities and Exchange Commission accounting fraud case for $30.8 million.

The company disclosed the settlement Friday, when it was approved in United States District Court in Chicago. Waste Management said it would pay $26.8 million of the sum in the three-year-old case.

Dean L. Buntrock, 74, the former chief executive, and three other former executives agreed to pay the remaining $4 million. Mr. Buntrock will pay $2.3 million, the largest fine ever imposed on an individual in an S.E.C. accounting fraud case.

A fifth executive, the former chief financial officer, James E. Koenig, opted to contest the agency's claims.

Under the accord, Waste Management agreed to pay $17.1 million for Mr. Buntrock, whom the agency accused in 2002 of leading a fraud from 1992 to 1997 that cost shareholders $6 billion. The company also agreed to pay $7.6 million for Phillip B. Rooney, 61; another $1.15 million for Thomas C. Hau, 69; and $950,000 for Herbert A. Getz, 50.

The four executives neither admitted nor denied wrongdoing.

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Waste Management Case Study Examination of Fraud

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Waste Management $1.8 Billion Scandal - Explained

Waste Management ($WM) is a waste and environmental services company that operates in 20 countries. It mainly deals with garbage management from collection to recycling. Their clients consist of major businesses, residential areas, etc, and usually have contracts with cities to bring it to transfer stations where the waste is compacted, ultimately ending up in landfills they own and operate. This brings $18 Billion in revenue in 2021.

Rise of WM Inc.

The 1950s is when the waste industry started expanding because there was more garbage being produced. This was right after WW2, there was a baby boom, and the population was expanding at an incredible rate. In 1956, there was a small garbage collection company called Ace Scavenger. At the time they were only operating 12 garbage trucks around the Chicago area, But they noticed the new potential in the industry and invested heavily in expanding this business - bought new trucks, made deals for garbage collection in new areas, acquired some of their smaller competitors.

In 1965, The government responded to this nationwide increase in trash production by implementing stricter laws and stricter rules. Most small businesses shut down. Ace Scavenger had spent the last decade expanding so they made it, and a couple of years later they merged with another similar company and the resulting company was called Waste Management.

In 1971, They went public and started acquiring competing companies with the capital they raised. They landed some contracts from other countries. They also started getting involved in the disposal of chemical and toxic waste on which the government was making new regulations. In the 1980s they were involved in a line of scandals that involved dumping hazardous waste in illegal places, resulting in millions of dollars in fines, a sharp decline in their stock price, and a lot of negative publicity.

In the early 90s, after years of mostly non-stop growth and success, They finally started experiencing some major financial troubles. There are multiple factors responsible for this, the primary being a weaker economy, resulting in people spending less and generating less waste. In 1993 the revenue fell for the first time ever and profits were down.

When earnings come in below expectations, it negatively impacts stock price and the company’s overall public image. And hence, from the years 1992-97, WM Inc. fraudulently made it appear that they were doing better than they really were. Dean Buntrock is responsible for most of this, as he's the one who set earnings targets, maintained a culture of fraudulent accounting, personally directed specific accounting changes to be made to make targeted earnings, and was the spokesperson who announced these earnings to the public.

Accounting Scams

In 2002, The Securities and Exchange Commission (SEC) filed suit against the founder and five other former top officers of WM Inc. charging them with perpetrating a massive financial fraud lasting more than 5 years. The complaint, filed in the U.S. district court in Chicago charged that the defendants engaged in a systematic scheme to falsify and misrepresent Waste Management's financial results between 1992-97. The company officials cooked the books and enriched themselves for years and duped unsuspecting shareholders.

As the SEC put it, they avoided depreciation expenses on their garbage trucks by assigning unsupported and inflated salvage values and extending their useful lives. This effectively adds money to their earnings that shouldn't be there. They also assigned arbitrary salvage values to other assets that previously held no salvage value.

They failed to record expenses for decreases in the value of landfills and refused to record expenses necessary to write off the cost of unsuccessful and abandoned landfill development projects. Hence, by making such adjustments, they fraudulently increased their earnings. They scammed investors, who decide which stock to buy based on such information. In 1996 documents stated that Waste Management made $192 Million that year when in reality they lost $39 Million.

These numbers were even verified by an independent auditing firm, Arthur Andersen (A&A). Despite finding irregularities, They signed off on the records, as they felt a conflict of interest since they would make more money keeping Waste Management as a client.

The SEC estimates that Dean Buntrock (CEO of WM Inc.) gained more than $17 Million through performance-based bonuses, retirement benefits, charitable giving, and selling company stock while the fraud was happening. For example, he received a tax benefit by donating inflated company stock to his former college to fund a building in his name.

Arthur Andersen paid a $7 Million penalty, which was the largest ever against an accounting firm. In addition to this, Waste Management agreed to pay $220 Million to settle shareholder lawsuits. Waste management's management team decided to pay over $30 Million to the SEC, Most of which came from Buntrock.

Today, Waste Management is back on its feet and doing better than ever. WM is now the largest player in the garbage recycling space with a market capitalization of $64 Billion. Major shareholders of WM include Bill Gates, Vanguard, and BlackRock.

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To read this content please select one of the options below:

Please note you do not have access to teaching notes, an analysis of fraud at waste management and andersen’s professional responsibilities.

Research on Professional Responsibility and Ethics in Accounting

ISBN : 978-1-78190-844-0 , eISBN : 978-1-78190-845-7

Publication date: 16 August 2014

The purpose of the case is to provide an opportunity for students to research Securities and Exchange Commission filings in the Waste Management fraud and apply their knowledge of ethics and professional responsibilities to assess whether Andersen met its ethical obligations under the AICPA Code of Professional Conduct. The Waste Management fraud was selected because of the depth of accounting and auditing issues including: failing to properly record expenses; purposeful overstatement of earnings; netting one-time gains against operating expenses; failing to insist that proposed audit adjustments are made; and a lack of independence, objectivity, and due care in the performance of professional responsibilities.

The case describes the $1.7 billion earnings restatement at Waste Management during 1992 – 1997. Students use a framework to analyze accounting irregularities and their effects on the financial statements. They critically evaluate Andersen’s professional judgments and decision-making process by examining accounting and audit deficiencies described in SEC documents. Materiality issues are explored to evaluate Andersen’s contention that the misstatements in the financial statements were not material.

• Professional judgment
• Earnings restatements
• Financial statement fraud

Mintz, S. (2014), "An Analysis of Fraud at Waste Management and Andersen’s Professional Responsibilities", Research on Professional Responsibility and Ethics in Accounting ( Research on Professional Responsibility and Ethics in Accounting, Vol. 17 ), Emerald Group Publishing Limited, Leeds, pp. 203-224. https://doi.org/10.1108/S1574-0765(2013)000017012

Emerald Group Publishing Limited

Copyright © 2013 Emerald Group Publishing Limited

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Fraud at Waste Management

A brief history, before the fraud.

Waste Management was created in 1968 by the merger of two companies, owned by cousins Wayne Huizenga and Dean Buntrock.  Revenues in the first year of business were a modest $5.5 million, but the company would grow rapidly in the following years by acquiring other local waste companies across the country.  Just three years later, in 1971, Waste Management went public.  The company used the proceeds from the public offering to acquire 75 other local waste operators in the following 18 months.  From 1971 to 1980, the company revenues grew at a phenomenal rate, increasing sales at an average of 48% per year.  By 1979 sales had grown to $382 million.  Just three years later, in 1982, sales had grown to almost $1 billion.   Sales more than doubled in the following three years and by 1985 sales exceeded $2 billion.   For many companies, rapid growth results in temporary inefficiencies and thin profit margins.  Despite the rapid growth rate, Waste Management was very profitable.

Co-founder Wayne Huizenga left Waste Management in 1984 and went on to found Blockbuster and AutoNation.  Huizenga was named “CEO of The Year” five times by Financial World magazine.  Huizenga’s prosperous and noteworthy career continued long after leaving Waste Management.  Unfortunately, co-founder Dean Buntrock would choose another path after Huizenga’s departure…the path of financial statement fraud.

Waste Management continued to grow through acquisitions.  By 1990, the company was the largest waste management company in the United States and had operations in several other countries.  While revenues increased by expanding the types of services provided, much of the company’s growth had been fueled by acquiring other garbage collection and disposal companies.  However, with each acquisition there were fewer remaining companies in the industry and acquisitions could no longer be used for growth. 

As Growth Stalls, Fraud Begins

By the early 1990’s, Waste Management had passed beyond the rapid growth stage and was now moving into the mature, slow-growth stage of the company lifecycle.  Stock analysts and investors continued to expect strong growth from the company, and if management could not continue the growth pattern the stock price would fall.  Waste Management had been using company stock as currency to make acquisitions of other companies, and a falling stock price would make those acquisitions more difficult.  Also, a falling stock price would greatly affect the wealth of company executives.

Unable to continue growth through ethical methods, management turned to financial statement fraud to create the illusion of continued growth.  The company began the fraud during 1992, and continued through 1996.  In June 1996, Dean Buntrock retired and appointed Waste Management president and Chief Operating Officer Phillip B. Rooney to be his successor as CEO.  Rooney resigned under pressure from the board just eight months later, in February, 1997.  Buntrock returned as caretaker for five months until July, 1997, when the board hired Ronald L. Lemay from Sprint to be the new Waste Management CEO.  Lemay began an investigation into accounting irregularities, and then resigned abruptly after only three months.  Such a rapid succession of executives typically causes investors and analysts great concern.  In the case of Waste Management, those concerns were well-founded.

After Lemay’s abrupt resignation, the Waste Management board hired turnaround expert Robert S. Miller as the new CEO.  The investigation launched by Lemay ultimately led to the company revising the annual financial reports for 1992 through 1996, plus the first three quarters of 1997.  The revision caught the attention of the SEC, which launched an investigation.  On March 26, 2002, the U.S. Securities and Exchange Commission issued a press release citing fraud charges against Dean Buntrock and several other defendants.

The Perpetrators

The Securities and Exchange Commission files suit against Waste Management on March 26, 2002.  They alleged that the company inflated profits by 1.7 billion dollars while making millions of dollars for the top executives and defrauding investors out of 6 billion dollars.

Thomas C. Newkirk, associate director of the SEC’s Division of Enforcement, stated in the SEC press release that the Waste Management fraud was “one of the most egregious accounting frauds we have ever seen.  For years, these defendants cooked the books, enriched themselves, preserved their jobs, and duped unsuspecting shareholders.  The defendants’ fraudulent conduct was driven by greed and a desire to retain their corporate positions and status in the business and social communities.  Our goal is to take the profit out of securities fraud and to prevent fraudsters from serving as officers or directors of public companies.” [1]

Below are the executives cited in the indictment:

Dean Buntrock

Dean Buntrock Waste Management’s founder, chairman of the board of directors, and chief executive officer.  While presenting himself as a successful entrepreneur, Buntrock set a culture of fraudulent accounting in Waste Management by setting high earnings targets and directed accounting changes to meet those targets to keep investor confidence up in the company.  Buntrock indulged in philanthropy by donating inflated company stock to his alma mater, St. Olaf College, which named their student center Buntrock commons after him.  This also gave Buntrock a large tax benefit.  He was the primary beneficiary of the fraud receiving more than 16.9 million dollars in bonuses due to increased company performance, retirement benefits, tax write offs for charitable donations, and the sale of company stock during the fraud.

Phillip B. Rooney

Phillip B. Rooney president and chief operating officer, director, and CEO.  Rooney was in charge of the solid waste operations and had overall control over the company’s largest subsidiary.  In this position, Rooney was able to ensure that write offs the company needed to take were not recorded.  He also dismissed accounting decisions that would have any negative impact on the company.  For this, Rooney received 9.2 million dollars in bonuses due to increased company performance, retirement benefits, and the sale of company stock during the fraud.

James E. Koenig

James E. Koenig executive vice president and chief financial officer.  Koenig was the primary executioner of the fraud and covered the fraud up by misleading the company’s audit committee and internal auditors, destroying evidence, and withholding information from outside auditors.  Keonig received over $900,000 for his part in the fraud.

Thomas C. Hau

Thomas C. Hau vice president, corporate controller, and chief accounting officer.  Was considered the “principal technician” of the fraud by the SEC.  He created many one-time accounting transactions to make sure the earnings met their targeted goals.  He also wrote the deceptive disclosures used for the auditors and investors.  He was able to profit by more than $600,000 for his role.

Bruce D. Tobecksen

Bruce D. Tobecksen vice president of finance.  While acting as Keonig’s “right hand man,” Tobecksen was tasked to handle the overflow from Hau’s fraudulent accounting transactions.  He was enriched by over $400,000 for doing so.

Herbert Getz

Herbert Getz senior vice president, general counsel, and secretary.  Getz served as Waste Management’s general counsel.  In this role he approved the company’s fraudulent disclosures created by Hau and received over $450,000 from the fraud.

The Fraud Itself

To meet analysts and investor expectations, the company journalized several fraudulent accounting transactions to eliminate and defer expenses for the current period.  By decreasing the expenses on the income statement, the company is able to report a higher profit.  To do this, the company used several fraudulent accounting techniques:

Avoided depreciation expenses

Waste Management had a number of garbage trucks used in operations. To depreciate these trucks, the company’s management needed to assign a salvage value to each truck and the truck’s useful life.  Assigning values to these is done by every company, but the values (estimates) must be reasonable.  In the case of Waste Management, the estimates for the salvage values were inflated and the useful lives were extended.  This lowers the depreciation expense taken for these assets each period this raising the net income.  For any assets that did not have a salvage value, an arbitrary value was assigned to lower the depreciation expense.

Failed to record landfill expenses

As Waste Management filled their landfills with waste, they needed to record the related expenses. This was not done to help keep expenses off of the income statement.  They also neglected to record the expenses necessary to write off the costs of unsuccessful and abandoned landfill development projects.

Established inflated environmental reserves (liabilities)

By inflating the reserves in connection with acquisitions on the balance sheet, Waste Management was able to successful avoid recording unrelated operating expenses. This method is similar to booking an allowance for doubtful accounts and changing the estimates each period to reduce the overall reserve instead of expensing it out keeping the expenses off of the income statement.

Fraudulent accounting reserves

the company also improperly capitalized a variety of expenses. This allowed the company to avoid expensing the amounts in full in the period they were used and deferring the amounts to the balance sheet as assets.  For example, if a company purchased small equipment that was an immaterial amount to the company, they should expense that equipment.  By capitalizing the equipment, they are able to create an asset on the balance sheet that they can expense in small amounts over time instead of all at once.  The company also failed to establish enough reserves to pay for income taxes and other expenses.

The decision to make the accounting irregularities rested with Buntrock and others and the company’s headquarters.  They would make a budget for the company’s earnings and expenses and compare them to the actual amounts.  When the actual numbers fell short of the budgeted expectations, accounting adjustments were made to make sure the actual amounts matched the projected budgets.  This created a problem as the inflated numbers for the previous year were used as the floor for the next year’s budget.  Doing this was unsustainable for the company since the fraudulent earnings for one period had to be replaced in the next period.

One method the company used to try and maintain the stability of the fraud was to use an accounting manipulation known as “netting” or “geography.”  The company allegedly used netting to reduce operating expenses and accumulated accounting misstatements from prior periods by offsetting them against unrelated gains in the sales and exchanges of assets.  The “geography” entries moved large amounts of money between different line items on the income statement to make the financials look the way the company wanted to show them.

The Role of the Outside Auditors

The CPA firm of Arthur Andersen had been the auditors for Waste Management for many years.  The relationship between the two firms dated back to the early 1970’s.  In the early 1990’s, Waste Management limited the audit fees they would pay to Andersen, indicating that they would give Andersen consulting contracts to replace profit lost in the annual audit.

The SEC investigated Andersen’s role in the fraud and determined that Andersen had been involved in helping Waste Management hide the fraud from investors.  Arthur Andersen knew of the erroneous financial reports.

The appropriate alternatives for Andersen would be to either

• require the client to correct the financial reports before they are issued or
• disclose the problems to investors with a qualified or adverse opinion on the financial statements.

Instead, Andersen entered into a written agreement with Waste Management called “Summary of Action Steps.”  This agreement required that the total amount of the past fraud would be adjusted over the following ten years.  Andersen’s audit team would propose adjusting entries each year to amortize one-tenth of the fraud.  Essentially, this was a written agreement between the two firms to create fraud in the future in order to cover up the frauds of the past.  Andersen did propose the entries in later years, but Waste Management’s executives refused to make the adjustments because this would impair their ability to meet earnings expectations of analysts and investors.   In spite of Waste Management’s refusal, Andersen continued to give a “clean” unqualified opinion on the financial statements each year.  It is believed that this lasted at least six years.  A copy of the SEC’s Litigation Release is presented below:

 SEC’s Litigation release for Waste Management

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Litigation release no. 17039 / june19, 2001.

ACCOUNTING AND AUDITING ENFORCEMENT RELEASE NO. 1410 / June19, 2001

ARTHUR ANDERSEN LLP AND THREE PARTNERS SETTLE CIVIL INJUNCTIVE ACTION CHARGING VIOLATIONS OF ANTIFRAUD PROVISIONS, AND SETTLE RELATED ADMINISTRATIVE PROCEEDINGS, ARISING OUT OF ANDERSEN’S AUDITS OF WASTE MANAGEMENT, INC.’S  FINANCIAL STATEMENTS

ANDERSEN PRACTICE DIRECTOR SETTLES ADMINISTRATIVE PROCEEDINGS FOR IMPROPER PROFESSIONAL CONDUCT ARISING OUT OF FIRM’S AUDIT OF WASTE MANAGEMENT, INC.’S 1995

FINANCIAL STATEMENTS

Securities and Exchange Commission v. Arthur Andersen LLP, Robert E. Allgyer, Walter Cercavschi, and Edward G. Maier ,  Civil Action No. 1:01CV01348 (J.R.) (D.D.C. June 19, 2001)

In the Matter of Arthur Andersen LLP ,  Administrative Proceeding File No. 3-10513

In the Matter of Robert E. Allgyer, CPA ,  Administrative Proceeding File No. 3-10515

In the Matter of Edward G. Maier, CPA ,  Administrative Proceeding File No. 3-10514

In the Matter of Walter Cercavschi, CPA ,  Administrative Proceeding File No. 3-10516

In the Matter of Robert G. Kutsenda, CPA ,  Administrative Proceeding File No. 3-10517

The Securities and Exchange Commission (“Commission”) announced today that Arthur Andersen LLP and three of its current and former partners settled a civil injunctive action, charging violations of antifraud provisions of the federal securities laws, as well as related administrative proceedings brought pursuant to rule 102(e) of the Commission’s Rules of Practice (“rule 102(e)”). In a related action, a fourth Andersen partner, a regional practice director, settled administrative proceedings brought pursuant to rule 102(e) in which the Commission found that he engaged in improper professional conduct. These proceedings arise out of one or more of Andersen’s audits of Waste Management, Inc.’s (“Waste Management” or the “Company”) financial statements during the period 1992 through 1996.

Andersen and the individual defendants and respondents, without admitting or denying the allegations or findings in the Commission’s Complaint and orders, consented to the following sanctions:

• Arthur Andersen LLP  (“Andersen” or “Firm”) , a national accounting firm, consented (1) to the entry of a permanent injunction enjoining it from violating section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and rule 10b-5 thereunder; (2) to pay a civil money penalty in the amount of $7 million; and (3) in related administrative proceedings, to the entry of an order pursuant to rule 102(e) censuring it based upon the Commission’s finding that it engaged in improper professional conduct and the issuance of the permanent injunction;
• Robert E. Allgyer  (“Allgyer”) , the partner responsible for the Waste Management engagement, consented (1) to the entry of a permanent injunction enjoining him from violating section 10(b) of the Exchange Act and rule 10b-5 thereunder and section 17(a) of the Securities Act of 1933 (“Securities Act”); (2) to pay a civil money penalty in the amount $50,000; and (3) in related administrative proceedings pursuant to rule 102(e), to the entry of an order denying him the privilege of appearing or practicing before the Commission as an accountant, with the right to request his reinstatement after five (5) years;
• Edward G. Maier   (“Maier”) , currently a partner and then the risk management partner for Andersen’s Chicago office and the concurring partner on the Waste Management engagement, consented (1) to the entry of a permanent injunction enjoining him from violating section 10(b) of the Exchange Act and rule 10b-5 thereunder and section 17(a) of the Securities Act; (2) to pay a civil money penalty in the amount $40,000; and (3) in related administrative proceedings pursuant to rule 102(e), to the entry of an order denying him the privilege of appearing or practicing before the Commission as an accountant, with the right to request his reinstatement after three (3) years;
• Walter Cercavschi   (“Cercavschi”),  currently a partner and then a partner on the Waste Management engagement, consented (1) to the entry of a permanent injunction enjoining him from violating section 10(b) of the Exchange Act and rule 10b-5 thereunder and section 17(a) of the Securities Act; (2) to pay a civil money penalty in the amount $30,000; and (3) in related administrative proceedings pursuant to rule 102(e), to the entry of an order denying him the privilege of appearing or practicing before the Commission as an accountant, with the right to request his reinstatement after three (3) years;
• Robert G. Kutsenda  (“Kutsenda”) , currently a partner and then the Central Region Audit Practice Director responsible for Andersen’s Chicago, Kansas City, Indianapolis, and Omaha offices (“Practice Director”), consented in administrative proceedings pursuant to rule 102(e), to the entry of an order, based on the Commission’s finding that he engaged in improper professional conduct, denying him the privilege of appearing or practicing before the Commission as an accountant, with the right to request reinstatement after one (1) year.

The Commission alleged in its Complaint, or found in its Orders, as follows:

• Andersen knowingly or recklessly issued false and misleading unqualified audit reports on Waste Management’s annual financial statements for the years 1993 through 1996. The audit reports stated that the Company’s financial statements were presented fairly, in all material respects, in conformity with generally accepted accounting principles (“GAAP”) and that Andersen’s audits were conducted in accordance with generally accepted auditing standards (“GAAS”). These representations were materially false and misleading.
• In February 1998, Waste Management announced that it was restating its financial statements for the five-year period 1992 through 1996 and the first three quarters of 1997 (the “Restatement”). To date, the Restatement is the largest in the Commission’s history. In the Restatement, the Company admitted that through 1996 it had materially overstated its reported pre-tax earnings by $1.43 billion and that it had understated certain elements of its tax expense by $178 million.
• Andersen audited the Restatement and issued an unqualified audit report on it. The Restatement addressed misstatements that resulted from accounting practices that improperly increased reported operating income primarily by understating operating expenses. In most instances, the Company had improperly deferred recognition of current operating expenses to future periods in order to inflate its current period income. The Company admitted that it had misstated its expenses relating to, among other things, vehicle, equipment and container depreciation, capitalized interest, asset impairments, purchase accounting related to environmental remediation reserves and other liabilities.
• In one or more audits during the period 1993 through 1996, Andersen, through Allgyer, Maier, and Cercavschi, identified and documented numerous accounting issues giving rise to the misstatements and likely misstatements that the Restatement ultimately addressed, and brought certain of the issues to the attention of Andersen’s Practice Director, the firm’s Managing Partner and the Audit Division Head for the firm’s Chicago office (“Audit Division Head”). The engagement team also consulted with and relied upon Andersen’s waste industry expert in its Accounting Principles Group (a unit within Andersen available for consultation on significant accounting issues) concerning certain of the Company’s improper accounting practices discussed herein.
• With respect to many of the non-GAAP accounting practices, Andersen failed to quantify and estimate all known and likely misstatements resulting from the accounting issues that the engagement team identified. During the years in question, Andersen quantified only certain of the misstatements. For example, in its 1993 audit, the engagement team quantified current and prior period misstatements of $128 million, which, if recorded, would have reduced net income before special items by 12%. The engagement team also identified, but did not quantify and estimate, accounting practices that gave rise to other known and likely misstatements. Allgyer and Maier consulted with the Practice Director and the Audit Division Head and informed them of the quantified misstatements and “continuing audit issues,” and Allgyer consulted with the Firm’s Managing Partner and informed him of the quantified misstatements and “continuing audit issues.” The partners determined that the misstatements were not material and that Andersen could issue an unqualified audit report on the Company’s 1993 financial statements.
• In connection with the 1993 audit, following the consultations noted above, and prior to the Company’s announcement of its 1993 earnings, Allgyer presented a “plan” – known as the “Summary of Action Steps” (“Action Steps”) – to the Company’s Chief Executive Officer (later signed and initialed by the Company’s Chief Financial Officer and Chief Accounting Officer) to reduce, going forward, the cumulative amount of the quantified misstatements and to change, among other things, the accounting practices that gave rise to the quantified misstatements and to the other known and likely misstatements. According to an internal memorandum that Allgyer distributed, the Action Steps were the “minimum changes we have concluded are necessary for WMX to implement immediately” and concluded that the Company’s compliance with the “must do” items [in the Action Steps] “brings the Company to a minimum acceptable level of accounting . . . .” The Action Steps also evidenced the fact that Andersen had identified the non-GAAP accounting practices that gave rise to numerous misstatements in the Company’s 1993 through 1996 financial statements.
• In 1994, the Company continued to engage in the accounting practices that gave rise to the quantified misstatements and the other known and likely misstatements. As in 1993, the Practice Director, the Firm’s Managing Partner and the Audit Division Head were consulted, and they again concurred in the issuance of an unqualified audit report on the Company’s 1994 financial statements.
• In 1995, in many instances, the Company did not implement the Action Steps and continued to utilize accounting practices that did not conform with GAAP. Andersen monitored the Company’s compliance or lack of compliance with the Action Steps. In its 1995 financial statements, the Company used a $160 million gain that it realized on the exchange of its interest in an entity known as ServiceMaster to offset $160 million in unrelated operating expenses and misstatements that, in most instances, had been identified as misstatements in 1994 and earlier. The Company offset the misstatements and expenses against the gain in Sundry Income, Net. The amount netted represented 10% of 1995 pre-tax income before special charges. The Company made no disclosure of the netting.
• After reaching a preliminary determination that the amounts being netted were not material to the financial statements taken as a whole, two of the partners on the engagement consulted with the Practice Director for Andersen’s Central Region about the netting and whether Andersen would be required to qualify or withhold its audit report if the Company netted the ServiceMaster gain and did not disclose the netting. The Practice Director understood that only prior period adjustments would be netted. He concluded that, although the netting did not conform with GAAP   and the netted items would not be disclosed, Andersen did not need to qualify or withhold its audit report. He reasoned that the netting and the non-disclosure of the misstatements and the unrelated gain did not prevent the issuance of the unqualified audit report because he concluded, for various reasons, that they   were not material to the Company’s 1995   financial statements taken as a whole. In fact, these items were material. Andersen’s 1995 unqualified audit report was materially false and misleading.

[t]he Company has been sensitive to not use special charges [to eliminate balance sheet errors and misstatements that had accumulated in prior years] and instead has used  `other gains’  to bury charges for balance sheet clean ups. [Emphasis in original] . . . . We disagree with management’s netting of the gains and charges and the lack of disclosures. We have communicated strongly to WMX management that this is an area of SEC exposure. We will continue to monitor this trend, and assess in all cases the impact of non-disclosure in terms of materiality to the overall financial statement presentation and effect on current year earnings.

• Despite its concerns about the Company’s use of netting, Andersen did not withdraw its 1995 audit report or take steps to prevent the Company from continuing to use netting in 1996 to eliminate current period expenses and prior period misstatements from its financial statements.
• During the 1996 audit, Andersen quantified misstatements in the Company’s financial statements, which equaled 7.2% of pre-tax income from continuing operations before special charges. The Company also netted and misclassified gains and profits of approximately $85.1 million on the sales of two subsidiaries, which Andersen also identified as improper, and which, if corrected in 1996, would have further reduced pre-tax income from continuing operations before special charges by 5.9%.
• Andersen has served as Waste Management’s auditors since before Waste Management became a public company in 1971.
• Andersen regarded Waste Management as a “crown jewel” client.
• Until 1997, every chief financial officer (“CFO”) and chief accounting officer (“CAO”) in Waste Management’s history as a public company had previously worked as an auditor at Andersen.
• During the 1990s, approximately 14 former Andersen employees worked for Waste Management, most often in key financial and accounting positions.
• Andersen regarded Allgyer as one of its top “client service” partners. Andersen selected Allgyer to become the Waste Management engagement partner because, among other things, Allgyer had “extensive experience in Europe” and demonstrated a “devotion to client service” and had a “personal style that . . . fit well with the Waste Management officers.” During this time (and continuing throughout his tenure as engagement partner for Waste Management), Allgyer held the title of “Partner in Charge of Client Service” for Andersen’s Chicago office and served as “marketing director.” In this position, Allgyer coordinated the marketing efforts of Andersen’s entire Chicago office including, among other things, cross-selling non-attest services to audit clients.
• Shortly after Allgyer’s appointment as engagement partner, Waste Management capped Andersen’s corporate audit fees at the prior year’s level but allowed the Firm to earn additional fees for “special work.”
• As reported to the audit committee, between 1991 and 1997, Andersen billed Waste Management corporate headquarters approximately $7.5 million in audit fees. Over this seven-year period, while Andersen’s corporate audit fees remained capped, Andersen also billed Waste Management corporate headquarters $11.8 million in other fees, much of which related to tax, attest work unrelated to financial statement audits or reviews, regulatory issues, and consulting services.
• A related entity, Andersen Consulting, also billed Waste Management corporate headquarters approximately $6 million in additional non-audit fees. Of the $6 million in Andersen Consulting fees, $3.7 million related to a Strategic Review that analyzed the overall business structure of the Company and ultimately made recommendations on implementing a new operating model designed to “increase shareholder value.” Allgyer was a member of the Steering Committee that oversaw the Strategic Review, and Andersen Consulting billed his time for these services to the Company. In setting Allgyer’s compensation, Andersen took into account, among other things, the Firm’s billings to the Company for audit and non-audit services.

[u]nless the auditor stands up to management as soon as it knows that management is unwilling to correct material misstatements, the auditor ultimately will find itself in an untenable position: it either must continue issuing unqualified audit reports on materially misstated financial statements and hope that its conduct will not be discovered or it must force a restatement or qualify its report and thereby subject itself to the liability that likely will result from the exposure of its role in the prior issuance of the materially misstated financial statements.

Andersen failed to stand up to management to prevent the issuance of materially misstated financial statements. Instead, Andersen allowed the Company to establish – and then continue for many years – a series of improper accounting practices. As a result, Andersen found itself in 1998 in the position of auditing the Restatement and issuing an unqualified audit report in which it acknowledged that the prior financial statements on which it had issued unqualified audit reports were materially misstated.

the circumstances of this case, including the positions within the Firm of the partners who were consulted by the engagement team, the gravity and duration of the misconduct, and the nature and magnitude of the misstatements mandate that the Firm be held responsible for the acts of its partners in causing the Firm to issue false and misleading audit reports in the Firm’s name.

• The Commission’s Complaint alleges and the Commission’s Order found that Andersen knew or was reckless in not knowing that the unqualified audit reports that it issued for the years 1993 through 1996 were materially false and misleading because the audits were not conducted in accordance with GAAS and the financial statements did not conform to GAAP. The Complaint further alleges that Andersen violated section 10(b) of the Exchange Act and rule 10b-5 thereunder. The Commission’s Order as to Andersen finds that Andersen engaged in improper professional conduct within the meaning of rule 102(e)(1)(ii) of the Commission’s Rules of Practice.
• Allgyer is the only Defendant charged in connection with Andersen’s audit of Waste Management’s 1992 financial statements. The Complaint alleges that Allgyer knew or was reckless in not knowing that the Andersen’s audit report on the Company’s 1992 financial statements was materially false and misleading because in addition to quantified misstatements totaling $93.5 million that, if corrected, would have reduced pre-tax income before accounting changes by 7.4%, he knew or was reckless in not knowing of additional known and likely misstatements that had not been quantified and estimated that related to, among other things, land carrying values in excess of net realizable value, improper charges of operating expenses to the environmental remediation reserves (liabilities) and purchase accounting related to remediation reserves (liabilities). Allgyer further knew that the Company had netted, without disclosure, $111 million of current period expenses and prior period misstatements against a portion of a one-time gain from an unrelated initial public offering of securities, which had the effect of understating Waste Management’s 1992 operating expenses and overstating the Company’s income from operations.
• The Commission’s Complaint further alleges that Allgyer engaged in similar conduct in connection with the 1993 through 1996 audits. Allgyer thus knew or was reckless in not knowing that Andersen’s unqualified audit report for each of the years 1993 through 1996 was materially false and misleading.
• The Complaint further alleges that Allgyer knew that during the years 1992 through 1996 every unqualified audit report would be incorporated into one or more registration statements filed with the Commission. As a result of his conduct, Allgyer violated section 10(b) of the Exchange Act, rule 10b-5 thereunder and section 17(a) of the Securities Act.
• The Commission’s Complaint alleges that, for each of the years 1993 through 1996, Maier knew of the quantified misstatements and of accounting practices that gave rise to additional known and likely misstatements that were not quantified and estimated and approved the issuance of an unqualified audit report. He knew or was reckless in not knowing that Andersen’s unqualified audit report for each of the years 1993 through 1996 was materially false and misleading. He further knew that, during this period, every unqualified audit report would be incorporated into one or more registration statements filed with the Commission. As a result of his conduct, Maier violated section 10(b) of the Exchange Act, rule 10b-5 thereunder, and section 17(a) of the Securities Act.
• The Commission’s Complaint alleges that, for each of the years 1994 through 1996, Cercavschi knew of the quantified misstatements and of accounting practices that gave rise to additional known and likely misstatements that were not quantified and estimated and approved the issuance of an unqualified audit report. He knew or was reckless in not knowing that Andersen’s unqualified audit report for each of the years 1994 through 1996 was materially false and misleading. He further knew that, during this period, every unqualified audit report would be incorporated into one or more registration statements filed with the Commission. As a result of his conduct, Cercavschi violated section 10(b) of the Exchange Act, rule 10b-5 thereunder, and section 17(a) of the Securities Act.
• The Commission’s Order as to Kutsenda finds that, during the 1995 audit, when Kutsenda was informed of the non-GAAP netting of the $160 million one-time gain against unrelated prior-period misstatements and that the amount represented 10% of the Company’s 1995 pre-tax income, he knew or should have known that the Company’s use of netting warranted heightened scrutiny. The Commission found that although not part of the engagement team, when he was consulted by two of the engagement partners, Kutsenda was required under GAAS to exercise due professional care so   that an unqualified audit report was not issued on financial statements that were materially misstated. The Order further finds that Kutsenda wrongly concluded that Andersen was not required to withhold or qualify   its audit report and that in reaching this result, he engaged in highly unreasonable conduct that resulted in a violation of applicable professional standards. Based on these findings, the Commission found that Kutsenda engaged in improper professional conduct within the meaning of rule 102(e)(1)(ii). [2]

The Effect of the Fraud

The fraud at Waste Management was intended to cause rising stock prices.  The stock rose from $17.11 at the beginning of 1992 to a peak of over $55 in August, 1998.  The stock then waivered for about a year before collapsing in July, 1999.  Table 1 depicts the rapid rise and collapse of the stock from 1992 through 1999. [3]

Waste Management Stock Prices – 1992 through 1999

While these executives profited from the stock price increase, investors lost $6 billion. The rapid increase in the stock price created great wealth for the corporate executives, who owned substantial amounts of stock and stock options.  The SEC determined that Buntrock was the mastermind behind the fraud and reaped the most in ill-gotten gains.  He was assisted by a number of Waste Management executives who benefited significantly from the fraud but to a lesser degree compared to Buntrock.  Table 2 shows the estimated profits that each of the perpetrators gained from the fraud in descending order of magnitude. [4]

Table 2 – Fraudulent Executive Profits

Waste Management Recovers

After the fraud at Waste Management became public, the company struggled for several years as it dealt with the legal ramifications of the fraud.  Although the fraud overstated profits, the company was profitable and able to survive.  The company spent considerable effort to rehabilitate its reputation.  Efforts included re-branding itself as a “green” company with environmental concerns, sponsoring an exhibit at Disney’s Epcot Center, and being the focus of first episode of the CBS series “ Undercover Boss .”

The stock price slowly recovered in the following decade, but has never reached the peak prices of 1998-1999. [5]

Table 3 – Waste Management Stock Prices

1999 through 2009

Questions for Research and Discussion

1. What were the incentives and pressures that led to the fraud?

2. Buntrock benefited the most from the Waste Management fraud.  Research and summarize what happened to Buntrock and evaluate if he may have felt the risk worth the reward.  Include any articles you used in your evaluation.

3. Research what happened to at least three of the Waste Management executives (other than Buntrock) named in the chapter (Rooney, Koenig, Hau, Tobecksen, Getz)?

• Summarize what happened to each executive (include links to your articles).
• Do you think the punishments was appropriate?

4. What happened to the auditing firm of Arthur Andersen as a result of their Waste Management audits?

• Do you think these consequences were appropriate?

5. Choose at least two of the four Arthur Andersen audit partners named in the chapter (Allgyer, Maier, Cercavschi, Kutsenda) and research what happened to them as a result of the Waste Management audit?

• Summarize what happened to each partner (include links to your articles).

6. What policies or procedures ( internal controls ) could Waste Management have used to avoid the fraud?

7. What policies or audit procedures could Arthur Andersen have used to avoid the problems in the Waste Management audit?

8. How did this case affect your views and opinions about Waste Management?

• Did you know about the company before this chapter?
• Would you do business with them?
• https://www.sec.gov/news/headlines/wastemgmt6.htm ↵
• http://www.sec.gov/litigation/litreleases/lr17039.htm ↵
• https://www.macrotrends.net/stocks/charts/WM/waste-management/stock-price-history ↵

Professional Ethics for Accountants Copyright © 2019 by Anne and Rob Diamond is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

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Promises, promises: A look at Waste Management's case against SAP

Waste Management's lawsuit against SAP for a "complete failure" of a $100 million software implementation boils down to promises. What did SAP promise Waste Management? And how much responsibility does Waste Management bear for believing those promises?

As background, news surfaced last week that Waste Management filed a complaint against SAP in the district court of Harris County, Texas. The suit, filed March 20, was fairly well publicized, but many of the accounts were thin on detail. Typically, IT failures aren't black or white. There are many shades of gray. Projects change, there's scope creep and often the vendor and the customer share some of the blame.

That disconnect isn't all that noteworthy. Enterprise software companies typically say there is no customization required and customers still need to tweak. What's interesting is that Waste Management is going after SAP in a very public manner. I'm familiar with Waste Management from a previous case study on the company. In a nutshell, it's a giant company that has been built via acquisition. Legacy systems were everywhere and a good chunk of them were outdated. From 2003 to 2005, Waste Management was becoming more than an army of small waste hauling firms and an integrated company. In 2005, Waste Management was looking to overhaul its order-to-cash process--billing, collections, pricing and customer set-up.

Also see: 7 common lies told by enterprise software sales people

A few choice excerpts and the lessons learned:

"In order to gain acceptance in the United States waste and recycling software market, and to obtain large monetary benefits from current and future license and implementation fees, SAP fraudulently induced Waste Management to license an 'United States applicable' Waste and Recycling Software solution. This software was represented to be 'a waste industry standard solution with no customization required.' SAP further represented that the software was an 'integrated end-to-end solution.' Unknown to Waste Management, this 'United States' version was undeveloped, untested and defective. Although SAP knew of the software's defects and its inability to function in the United States market conditions, it nevertheless represented that the software was a mature, 'out-of-the-box' solution with the functionality and scalability necessary to meet Waste Management's specific business requirements and transaction volumes."

Lessons learned: If your mother says she loves you check it out. One question: Wouldn't a pilot have surfaced this software as a joke? What were the probing questions being asked of SAP here? SAP had competition and formulated its pitch based on being out-of-the-box and being rapidly installed, according to the complaint. How realistic was that expectation? Let's face it: ERP is brain surgery and sometimes there is no anesthesia. I'm inclined to laugh at any software vendor that pitches enterprise software out of the box. It's not a magic pill. Another wrinkle: SAP's sales effort was led by Dean Elger, a former Waste Management controller. Is that too cozy?

"SAP represented that its software was a 'proven solution' and that SAP had 'the implementation experience to deliver productive functionality in less than one year.' These representations were false as the software modules used by SAP in its 'United States' version of the waste and recycling software had never been used together before and had never been tested in an actual productive business environment. To further its deception, SAP personnel also helped develop a 'business case' for Waste Management that detailed how SAP's software purportedly would enable Waste Management to obtain hundreds of millions of dollars in increased efficiencies and revenue assurance. SAP never told Waste Management that this business case depended on an undeveloped product."

Lessons learned: Why would you depend on a vendor to develop a business case? Here's the deal: Vendor makes up metrics, you consider them for what they are--a marketing pitch--and then you do your own work or hire someone else to do the legwork for you. SAP's analysis predicted net annual benefits of $106 million to $220 million a year and those savings convinced Waste Management to enter a contract under its Safe Passage program, which is designed to poach Oracle customers.

"SAP presented Waste Management with a series of pre-contract product demonstrations consisting of what SAP represented was the actual waste and recycling software. Yet Waste Management has discovered-- and, in internal documents, SAP has admitted -- that the pre-contract demonstrations were in fact nothing more than fake, mock-up simulations that did not use the software ultimately licensed to Waste Management. SAP's senior executives, including its president, Bill McDermott, participated in these fake product demonstrations, which were rigged and manipulated..."

Lessons learned: If true, these demonstrations, which were given "on many occasions during an eight month time period in 2005," were on shaky ground and SAP should have disclosed its software was being developed. The software was built on SAP R/3. What do you do if you're a customer? Perhaps it all comes down to questions about other customers. If Waste Management would have asked what other waste and recycling companies used this software it would have likely caught SAP. For instance, there's no reason a company the size of Waste Management needs to be an early adopter and the suit notes that SAP only had small European waste companies as customers. Waste Management only has one major competitor--Allied Waste. It's a happy duopoly for the most part. If SAP's software was an alpha release at best Waste Management should have been the guinea pig for free. SAP would have made money for having Waste Management as a reference customer.

"SAP represented that it had well-trained personnel with the requisite expertise, experience and knowledge of the software to implement it rapidly on a company-wide basis...These representations were also false."

"SAP's attempted installation of the waste and recycling software at Waste Management was a complete failure. The installed software failed to contain basic functionality that had been represented and was unable to run Waste Management's most basic revenue management operation."

Lesson learned: Consultants have a role and it sounds like Waste Management could have really used an independent third party to evaluate and implement SAP. A law firm to create an escape clause out of this $100 million contract would also have been handy. This deal needed an escape hatch before a messy lawsuit.

Postscript: SAP had promised to implement this Waste Management system by Dec. 31, 2007. It never happened. According to Waste Management's complaint, SAP's solution to the contract spat is to convert the out-of-box implementation to a more involved software development effort.

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Case Studies: Investigating Where Garbage Goes Around the World

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Piles of recyclable material sit alongside docks in West Sussex, England, waiting to be exported abroad. Image: Shutterstock

Rubbish, trash, or garbage — whatever we call it, what we throw away is a big problem for society, and journalists around the world have set out to investigate what happens to our discarded items, using drones, trackers, and databases to interrogate a global trade in waste.

According to a 2022 OECD report, the world is producing twice as much plastic waste as two decades ago , and the bulk of it ends up in a landfill, incinerated, or leaking into the environment. Only 9% is successfully recycled.

In the US, around 221 kilograms, just under 500 pounds, of plastic waste is generated annually per person (in weight terms that’s the same as an upright piano), while in Europe, it’s around 114 kg. In Germany alone, over 380 million pairs of shoes are thrown away every year, almost five pairs per person.

Investigations into where our rubbish goes and the implications for the people and environment play an important role in raising awareness, says award-winning US-based investigative journalist Mark Schapiro, an Environmental Investigative Forum (EIF) board member.

“When things get thrown away they don’t just disappear. Investigations that reveal the hazards that waste can present are extremely important from a public health point of view, and in revealing another dimension to the profound inequities of who gets exposed to the toxic leakage from the waste stream,” says Schapiro, the author of “Exposed: The Toxic Chemistry of Everyday Products and What’s at Stake for American Power.”

Using Trackers to Follow the Rubbish

German journalists who investigated the fate of discarded sneakers in the “Sneakerjagd” or Sneakerhunt investigation — a 2022 European Press Prize-nominated story — demonstrated that while recycling may ease the consciences of consumers, it offers no easy answer to the garbage problem.

The journalists behind the project, Christian Salewski and Felix Rohrbeck, co-founders of investigative journalism publication Flip , had already used GPS trackers in an investigation into illegal exports of electronic waste, and decided to rework the idea to examine the fast fashion industry.

The German investigative site flip embedded GPS trackers into sneakers donated by German celebrities — and then followed the shoes’ journeys across the world. Image: Screenshot, Flip

They chose sneakers because production is booming, their layers of glued-together molded plastic make them hard to recycle, and the inner soles provide a convenient hiding place for trackers.

“We thought, why don’t we use celebrities’ sneakers? We wanted to have a social media impact and publish the story on different channels, using people with social media followers who are not necessarily interested in investigative journalism. We wanted to target younger people online, sneaker buyers, addressing the problem on their own timeline,” Salewski says.

The reporters recruited celebrities to film selfie-videos donating their used shoes, which were then placed into recycling bins provided by retailers, sneaker brands, nonprofits, or textile recycling firms. Inside were hidden tiny trackers equipped with GPS technology (which uses satellite technology to calculate position), GSM antenna (a wireless transmission system that connects cell phones), and movement detectors to conserve the batteries in sleep mode. They were programmed to transmit only in certain circumstances — after a significant movement, for example — helping to eke out tracker’s communication time for as long as possible.

Working with their media partners NDR and Zeit, the team constructed an interactive website to tell the story of each pair in different episodes with a dedicated data team using an API interface to transform the raw data from the trackers into an informative visual journey, with maps, images, videos, and text putting the tracker pings in context.

They filmed themselves tracking the shoes’ progress and in some cases traveled to the transmission sites to see what was happening on the ground.

“GPS is a very powerful tool for investigating where things end up once they are thrown away and GPS leads to data, which you can visualize on a map,” says Salewski. “Tracking is always in our toolbox. You need a little knowledge about the tech but it’s fun — it creates a natural cliffhanger: follow me as a reporter, I don’t know what will happen.”

The technique paid off. In one of the investigation’s biggest scoops, the team found that new Nike shoes were being destroyed instead of recycled.

And pair of white Pumas belonging to TV presenter Linda Zervarkis led them all the way to Nairobi, Kenya, where the reporters traveled to find out more about textile imports into Africa and the problems they cause, including huge, environmentally-damaging landfill sites largely made up of unwanted old clothes.

Sneakerjagd had a broad impact, reaching around 10 million people, Salewski says, with high-profile TV shows including Tagesschau helping boost its profile even more than social media.

“These stories are highly important to capture the trail of toxicity that waste creates,” says Schapiro. “It’s got to be reminded to people over and over and over. When waste comes out of your house or workplace, it doesn’t disappear. Part of these investigations is also about throwing the responsibility back on the manufacturer — often there are much less toxic alternatives available.”

Interrogate the Figures

Waste collection and recycling in Peru. Image: Marco Garro / Ojo Público

A painstaking trawl through data — followed up by on-the-ground reporting — was the basis for an investigation by journalists at Ojo Público, which published Latin America: the Repository for Other People’s Garbage in November 2022. That story highlighted the huge environmental and ethical problems created by exports of plastic waste to the region.

Journalists at the outlet, a GIJN member, found that the recycling process itself is fraught with problems and the surrounding industry is not transparent.

The trigger for the investigation? “A small report that said Latin America was the landfill for the world,” says Ojo Público journalist Kennia Velázquez, who worked with Moníca Cerbón and other colleagues on the story.

Mexican and Peruvian journalists partnered up to delve into the issue, using a data platform providing information about the shipping industry to pinpoint plastic garbage shipments.

The way that governments present plastic waste and recycling as problems for individuals to solve spurred their efforts. “There is a big discussion about what we do with plastic. Industry and governments say ‘you have to recycle your trash, be responsible.’ They put the responsibility onto the consumer, not the industry,” Velázquez says. “When I started to think about this investigation, I saw around me that plastic is everywhere, in the supermarket, at my house. We wanted to look at the dimensions of this.”

The team painstakingly trawled data showing containers of trash arriving in Latin America, separating out plastic waste from other shipments such as used batteries, contaminated water, and chemical products.

“That gave us an idea that the problem is bigger than we thought. Only in Mexico, we found 50,000 shipments,” Velázquez says.

Other countries ship trash to Latin America, supposedly for recycling by private companies in a lucrative business stream. The journalists found that the waste is often not ready for recycling, needs to be washed using polluting chemicals and water, or eventually ends up dumped in landfill, potentially contaminating the surroundings with microplastics. Some companies involved in the recycling process did not meet environmental regulations.

“One interesting thing about stories that reveal the export of waste is how these show, explicitly or implicitly, companies that manufacture goods including toxic components often are under no pressure to deal with the waste part of their product,” Schapiro says.

The Ojo Público analysis was done manually, using Excel, checking every line of description of each container — because each container description was different and automating the process might have meant missing valuable information.

The journalists then contacted the companies and governments responsible for the shipments. They got only one answer. “We saw a lot of opacity. We wrote to many governments, they never answered. Only one company answered and said everything was perfect,” Velázquez says. “There is no official data available in the countries, that’s why we went to the platform.”

The team decided to zoom in on individual sites, to highlight the scale of the problem and make the huge numbers easier for readers to comprehend.

Images played an important role and the team’s photographers even resorted to going undercover to take photos of a municipal waste site in Mexico, while drone images also helped build up a picture of the trash situation. “One of the things I wanted to illustrate is that we have a lot of trash — so why are we importing trash?” Velázquez says.

A Global Problem

Plastic recyclable bottles sorted into bags. Image: Juan José L. Plascencia / Ojo Público

In many parts of the world the coronavirus pandemic drove single-use plastic use higher and has sharpened the focus on the big question of what to do with used plastics. Back in Europe, in the two years since Sneakerjagd, the problem of Europe’s waste has certainly not gone away.

Last month, Investigate Europe published a large-scale investigation into the region’s plastic problem entitled Wasteland — Europe’s Plastic Disaster , aiming to shine a light on all areas of the plastic waste problem, using a data-driven approach.

The investigation uncovered the shortcomings of Europe’s circular economy, highlighting issues such as the pollution involved in incinerating rubbish and the illegal trade in waste.

“There was a lot of data crunching, but we used simple techniques, like spreadsheets, Excel, etc.,” explains Nico Schmidt, the lead researcher for the Wasteland investigation.

As for the Ojo Público reporters, the data-combing revealed a huge transparency problem. “The data comes first but then comes the story, so you look for peculiarities, you question the data and end up with a set of questions,” Schmidt says. “With waste you have many different data sources, and of course then you have to look at where the data is coming from, who is actually providing it.”

Sometimes data from plastic producers is presented almost as official data, he notes. “A lot of effort went into comparing the different data sources and even understanding very basic principles because sometimes things are just hidden in the footnotes.”

Other Notable Investigations

Dirty clothes — svt (sweden).

Sweden’s premier investigative program, Mission Investigate from public broadcaster SVT, joined international colleagues to reveal how organized crime earned millions of euros by stealing clothing from charity collection boxes. This 2021 documentary used GPS trackers, hidden cameras, drones, and on-the-street sleuthing to catch an international gang operating in multiple countries.

Dow Said It Was Recycling Our Shoes. We Found Them at an Indonesian Flea Market — Reuters (Singapore)

This recent Reuters special report looked into claims by the petrochemical giant Dow, which said it was working with the Singaporean government to transform old, donated sneakers into playground equipment and running tracks inside the tiny nation. But after using GPS trackers to monitor 11 pairs of donated shoes, Reuters found that 10 of them instead ended up being re-shipped through middlemen and, eventually, scattered across Indonesia. The team ultimately tracked down three of their target pairs of shoes, which had ended up in secondary shoe markets. None of the shoes followed the recycling path claimed by the corporation.

Follow the Garbage — Oštro (Slovenia)

In 2022, this Slovenian investigative site undertook an ambitious series that examined the fate of that country’s rubbish across several different consumer categories. To study where these items went, the team outfitted trackers to 30 common household products, including plastic bottles, a TV, computer, baby doll, backpack, and vacuum cleaner. It found many recyclables ended up in regular trash streams, and other items traveled to Croatia and Pakistan. Oštro also published a helpful methodology piece on lessons learned and advice for others looking to replicate this line of investigation.

One Third of the Waste That Could Be Reused Is Lost on the Way to Garbage Sorting Centers — Metropoles (Brazil)

This reporting project was prompted by a waste company being caught illegally dumping recyclable material in the capital of Brasilia. To understand if this was a one-time incident or emblematic of a systemic problem, the Brazilian online site attached more than five dozen trackers to common recyclable items and followed their progress for one month. The reporters found recyclables were frequently misdirected or mixed into common trash and ended up in landfills. The story spurred several waste companies and a municipal agency to respond to try to fix the issues. For its pioneering use of remote trackers to do accountability reporting on waste, Metropoles won a 2022 SIGMA Award .

Using Trackers to Investigate Where Unwanted Clothing Ends Up — Yle (Finland)

These stories from Finland, released in 2020 and 2021, drew international attention. Journalists from the country’s public broadcaster, Yle, hid six small trackers in used clothing in poor shape, put into charity bins and drop-off boxes where high street fashion chains collect used and unwanted clothes. Despite claims by charities that they don’t export clothes in bad condition, the team traced them to Latvia, Pakistan, and Africa — where they are called “dead white man’s clothes.”

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Elektrostal

City in moscow oblast, russia / from wikipedia, the free encyclopedia, dear wikiwand ai, let's keep it short by simply answering these key questions:.

Can you list the top facts and stats about Elektrostal?

Summarize this article for a 10 year old

Current time by city

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Current time by country

For example, Japan

Time difference

For example, London

For example, Dubai

Coordinates

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Geographic coordinates of Elektrostal, Moscow Oblast, Russia

City coordinates

Coordinates of Elektrostal in decimal degrees

Coordinates of elektrostal in degrees and decimal minutes, utm coordinates of elektrostal, geographic coordinate systems.

WGS 84 coordinate reference system is the latest revision of the World Geodetic System, which is used in mapping and navigation, including GPS satellite navigation system (the Global Positioning System).

Geographic coordinates (latitude and longitude) define a position on the Earth’s surface. Coordinates are angular units. The canonical form of latitude and longitude representation uses degrees (°), minutes (′), and seconds (″). GPS systems widely use coordinates in degrees and decimal minutes, or in decimal degrees.

Latitude varies from −90° to 90°. The latitude of the Equator is 0°; the latitude of the South Pole is −90°; the latitude of the North Pole is 90°. Positive latitude values correspond to the geographic locations north of the Equator (abbrev. N). Negative latitude values correspond to the geographic locations south of the Equator (abbrev. S).

Longitude is counted from the prime meridian ( IERS Reference Meridian for WGS 84) and varies from −180° to 180°. Positive longitude values correspond to the geographic locations east of the prime meridian (abbrev. E). Negative longitude values correspond to the geographic locations west of the prime meridian (abbrev. W).

UTM or Universal Transverse Mercator coordinate system divides the Earth’s surface into 60 longitudinal zones. The coordinates of a location within each zone are defined as a planar coordinate pair related to the intersection of the equator and the zone’s central meridian, and measured in meters.

Elevation above sea level is a measure of a geographic location’s height. We are using the global digital elevation model GTOPO30 .

Elektrostal , Moscow Oblast, Russia