The Organization:
Waste Management (WM) 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.
In 1971, WM went public and 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. 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” 5 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.
CEOs come & go:
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.
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.
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.
Following are some names that were a part of this plan:
Dean Buntrock: Dean Buntrock Waste Management’s founder, chairman of the board of directors, and chief executive officer.
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.
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.
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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.
Bruce D Tobeksen: 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.
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.
Modus Operandi: THE PLAN
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.
