Waste Management Fraud

Final Project

BS 325

Dustin Nystel
12/17/10

Waste Management Overview

Waste Management Inc. is a Houston Texas based company providing waste management
and other services in North America. Yahoo financial summarizes the company as follows: Waste
Management Inc. offers collections, transfer, recycling, disposal, and waste-to-energy services.
Its recycling operations include collections material processing, plastics materials recycling, and
commodities recycling. The company also provides recycling brokerage, and electronic recycling
services, including the collection, sorting, and disassembling of electronics to reuse or recycle
various collected materials. It also engages in renting and servicing portable restrooms for
municipalities and commercial customers under the name Port-o-Let. An extension of this
service includes its involvement in landfill gas-to-energy operations which is the capture and
reuse of naturally occurring methane gas at landfill sites. Finally, the company provides street
sweeping and parking services, portable self-storage, healthcare solutions services, services for
third parties for construct waste facilities, and municipal, industrial, commercial, and residential
trash and recycling services (Yahoo, 2010).
Waste Management Inc.s website offers a deeper look into the companys bragging
points in recent years. The company employs 45,000 employees to serve over 20 million
customers. In 2009 the company generated $2.01 earnings per diluted share, reduced operating
expenses by 14.5%, generated $1.4B in free cash flow, and returned $795M to shareholders
(wm.com, 2010). In addition to its financial success Waste Management Inc. is ensuring future
success through its continued advancement and exploration in reusable materials research and
development. Waste Management Inc. uses waste to create energy for 1 million homes, and they
hope to double that by 2020. The company managed 119 landfill-gas-to-energy projects

producing enough energy to power 400,000 homes, and theyve partnered with another company
to turn this gas into liquid fuel for its line of 800 natural gas burning trucks (wm.com, 2010).
Waste management Inc. operates in the industrial goods sector of the waste management
industry. Waste management boasts an impressive $17.26B in revenue positioning it as the third
highest grossing waste management company in the industry (Yahoo, 2010). The company is
doing so well that yahoo financial reported it intends to raise its dividend by 8% in the first
quarter of 2011. Waste Management Inc. is probably able to make this increase because its
Earnings Per Share are 100 times the industry average, and revenues 300 times industry average
based on yahoo financial figures. The company is a leader in its industry demonstrating
continued growth ($34.43/share) since bottoming out ($13.6875/share) in March of 2000 (Yahoo,
2010).
Waste Managements boasted about its strong financial performance and went on the list
some awards the company has won over the last four years, 74 awards to be exact. There was
also a generous section devoted to the companys ethics policy and its commitment to ethics at
all levels. Highlighted in the ethics section of Waste Management Inc.s website one finds three
main objectives: create an environment where every employee knows what is ethical, and what is
expected, training to ensure everyone understands the companys ethical standards, and possibly
most important a section on confidential whistle blowing (wm.com, 2010). This company seems
to have everything in place to represent everything that success is made from. It is steadily
increasing its price per share, it is continuously increasing its dividends for shareholders, it is
leading the industry in green initiatives and self-sustaining practices, and it has a sound ethics
program and good internal controls. But, Waste Management Inc. hasnt always been Waste
Management Inc., it used to be USA Waste Services until 1998 and those were different times.

The Fraud
In mid-July 1997 a new CEO took the reins at Waste Management Inc. and swiftly
ordered a review of the companys accounting practices and the rest they say is history. What
they discovered was that between 1992 and 1997 Waste Management Inc.s top executives in
collusion with their audit partner Arthur Andersen had misstated pretax earnings by more than
$1.7B (sec.gov, 2002). The companys revenues werent growing fast enough to meet earnings
targets so the colluders improperly eliminated and deferred current period expenses to inflate
earnings using what the chief accounting officer called his one-off scheme. This scheme was
really a grand form of lapping. The Principles of Fraud Examination 2ed. describes lapping as
paying one account with the funds for a different account, and covering that account with the
funds from a third account continuously to avoid detections (Wells, 2008). In this case the
fraudsters werent stealing cash from an account and covering it up, they were differing liabilities
to the next period. One way they balanced the extra liabilities in future periods was through
netting. Netting was the practice of covering pushed liabilities with one time special gains which
would offset (sec.gov, 2002).
The complaint filed with the SEC charged six senior executives with the following: they
avoided depreciation expenses on their garbage trucks by assigning unsupported and inflated
salvage values and extended their useful lives. They assigned arbitrary salvage values to other
assets that previously had no salvage value. They failed to record expenses necessary to write off
the costs of unsuccessful and abandoned landfill development projects. They established inflated
environmental reserves (liabilities) in connection with acquisitions so that excess reserves could
be used to avoid recording unrelated operating expenses. They improperly capitalized a variety

of expenses, and they failed to establish sufficient reserves (liabilities) to pay for income taxes
and other expenses (sec.gov, 2002).
Those involved in the fraud had absolute power and control over all of Waste
Management Inc.s operations including the founder, chief executive officer & chairman of the
board Dean L. Buntrock, Phillip B. Rooney, president, director, chief operating officer & chief
executive officer for a brief period, James E. Koenig, executive vice president and chief
executive officer, Thomas C. Hau, vice president, corporate controller & chief financial officer,
Herbert Getz, senior vice president general council, & secretary, and Bruce D. Tobecksen, vice
president of finance (sec.gov, 2002). Together and with the help of Waste Management Inc.s
auditing partner, Arthur Andersen there was no means to stop or detect the fraud.
Before moving on to the punishment section of the paper it is important to quantify
exactly how this fraud benefited the fraudsters. Buntrock was considered the driving force
behind the fraud setting the tone at the top. He set the earnings targets and personally directed
certain accounting changes to meet the targeted goals. Over the course of the fraud Buntrock was
revered as a philanthropic pillar of the community through his many charitable donations (i.e. tax
dodges). Buntrock was estimated to have made over $16.9 million over the course of the scheme.
Rooney was in charge of the companys largest subsidiaries and made sure necessary write-offs
were not made and he overruled accounting practices that would have a negative impact on
earnings. Rooney made around $9.2 million (fraudlaw, 2002).

Then there were the accountants making everything actually work. Koenig was
responsible for keeping the scheme afloat by misleading the company audit committee, internal
accountants and external auditors. Koenig cleared more than $900,000 during the scheme. Hau
was the technician for the fraudulent accounting and creator of the one-off technique. Hau
created the deceptive disclosures and benefitted in the form of $600,000. Tobecksen was
Koenigs right hand man and handled all Haus overflow which earned him $400,000. Then there
was Getz the companys general council who blessed the fraudulent disclosures to take home
$450,000 (fraudlaw.org, 2002). Finally over the seven year period of the fraud Arthur Anderson
was paid $7.5M in audit fees, $11.8M in other fees (tax, attest work), and $6 M in additional
non-audit fees including $3.7M for a strategic review analysis. All together Andersen billed
Waste Management Inc. $25.3M over seven years or $3.6M per year.

The External Auditor

Arthur Andersen was considered the best of the big five for many years, and was often
looked to for their pioneering accounting practices. With great knowledge comes great power
and with power comes responsibility, and Arthur Anderson developed a lousy track record for
being responsible. Arthur Andersen is the firm that was made famous by its clients including
Sunbeam, Baptist Foundation of Arizona, Waste Management Inc., WorldCom, and Enron. Each
client being reported to have perpetuated the largest fraud in history until the next client was
discovered and WorldCom finally took that title.
What made this particular Arthur Andersen fraud unique was the amount of documentary
evidence they produced demonstrating their acute knowledge and general enablement of the
fraud. When the fraud began, Waste Management Inc. management put a cap on Andersens

audit fees but offered the auditor the opportunity to earn additional fees through special work.
Andersen quickly found most of the companys improper accounting practices, but still issued
unqualified reports. Andersen justified providing clean reports because they were generating
PAJEs (Proposed Adjusting Journal Entries) (sec.gov, 2002). These PAJEs were the adjusting
entries necessary to correct the companys understated expenses and overstated earnings, and
Andersen provided a plan for Waste Management Inc. to implement these adjustments over time
to gradually correct the problem.
Andersen soon realized that they had entered onto a slippery slope with Waste
Management Inc. The auditor had allowed misconduct to occur, and they were responsible for
helping to cover it up. When the PAJEs failed to be implemented Andersen stepped up their
efforts to fix the problem by making Waste Management Inc. enter into a signed secret
agreement with specific steps to bail everyone out. This was a four page document with 32 action
steps for Waste Management Inc. to implement to correct and cover up its previous frauds by
balancing the books over the next ten years (sec.gov, 2002). Again, Waste Management Inc. did
not follow the steps because it would have caused the company to miss its goals.
Clearly, it seems unusual for a power house auditing giant like Arthur Andersen to have
continued to issue unqualified reports, when clearly there were ample reasons documented not to
issue such a report. Maybe the best explanation for this is the cozy relationship between
Andersen and Waste Management Inc. Andersen had served Waste Management Inc. since 1971
and considered the company to be a crown jewel client. Until 1997 every chief financial
officer and every chief accounting officer in Waste Managements history had worked as an
auditor for Arthur Andersen, this included 14 total employees in key positions throughout the

1990s (sec.gov, 2001). This practice along with others once again established Arthur Andersen as
an accounting pioneer, only this time they were teaching the world what not to do.

Penalties & Fines

The Securities and Exchange Commission found that Arthur Andersen and several key
individuals specifically failed to stand up to management, and they issued qualified reports
knowing that the reports contained misstatements and did not conform to GAAP or GAAS.
Ultimately the commission found that Arthur Andersen was guilty of violating section 10b of the
Securities and Exchange Act of 1934 and rule 10b-5and ordered to pay a civil fine of $7 million
(Chartier, 2002). This was not the first time Andersen had been in trouble, but this was the first
time it had been fined and it was the largest civil fine in accounting history, for a brief time.
The commission fined Arthur Andersen and also gathered evidence against specific
employees within Andersen to levy fines and charges against. Robert E. Allgyer was the partner
responsible for the Waste Management engagement. Allgyer was found to have violated section
10b of the Exchange Act, rule 10b-5, and section 17(a) of the Securities Act of 1933. Allgyer was
ordered to pay a civil fine of $50,000 and denied the privilege of practicing before the
commission with possible reinstatement after 5 years (sec.gov, 2001).
Edward G. Maier was an audit partner working on the Waste Management Inc.
engagement and was found to have violated the same rules as Allgyer, which earned him a
$40,000 civil fine and he was denied the privilege to practice with possible reinstatement after
three years. Walter Cercavschi was also a partner on the Waste Management Inc. audit and was
also found guilty of violating all of the same rules which earned him a $30,000 civil fine and
revoked privileges with possibility of reinstatement after three years. Robert G. Kutsenda was

the director of several Midwestern offices and was not found guilty of violating any rules but
was found guilty of engaging in improper professional conduct with caused him to be denied the
privilege of practicing accounting with the possibility of reinstatement after one year (sec.gov,
2001).
While the fines and judgments against Arthur Andersen were landmark in their size and
application Waste Management Inc. and its executives were dealt the stiffest penalties. Waste
Management Inc. was ordered to pay $457 million as a result of the restatement and more than
$30 million in separate fines issues to the companys top executives and fraudsters (Chartier,
2002).
The commission passed judgments against Buntrock, Rooney, Hau and Getz that
included barring them from ever acting as a director or officer in a public company ever again.
All were found to have violated sections 10(b) and 13(b) 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 (ehso.com, 2005). Additionally Hau is enjoined from adding and abetting
violations of section 13(b) (2) (A) of the exchange act, and from violating Exchange Act rules
13b2-1 and 13b2-2 (ehso.com).
As a result of the commissions findings the former executives were all assigned fines for
disgorgement, prejudgment of interest, and civil penalties. Buntrock paid the following penalties
totaling $19,447,670: $10,708,032 in disgorgement, $6,439,638 of prejudgment of interest, and
$2,300,000 civil penalty. Rooney paid the following penalties totaling $8,692,738: $4,593,764 in
disgorgement, $2,998,974 of prejudgment of interest, and $1,100,000 civil penalty. Hau paid the
following penalties totaling $1,578,890: $641,866 in disgorgement, $507,024 of prejudgment of

interest, and $430,000 civil penalty. Getz paid the following penalties totaling $1,149,756:
$472,500 in disgorgement, $477,256 of prejudgment of interest, and a $200,000 civil penalty.
Getz was also suspended from acting as an attorney for five years (ehso.com, 2005). James E.
Koenig was triad separately and found guilty of all of the counts as his colluders. Koenig was
permanently barred from acting as an officer or director of a public company and issued the same
category of fines as follows totaling $4,156,034: $831,500 in disgorgement, $1,246,517 of
prejudgment interest, and $2,078,017 civil penalty.

Change in Actions?
There arent any clear and specific actions that Waste Management Inc. took as a result of
this fraud or the subsequent penalties; they had already begun the process. The beginning of the
end to these fraudsters run came with a changing of the guard. The new CEO launched the
investigation into the companies accounting practices, and that proactive action was the first
positive sign of a strong tone from the top. Lawrence ODonnell, III was that CEO, and he was
responsible for rebuilding the multi-billion dollar company from the ground up, and regaining
investor confidence. As stated ODonnells efforts have been successful as the companys stock
has risen steadily since the fraud scandal.

Summary & Conclusion

The Waste Management Inc. fraud was the biggest at the time and ultimately cost
investors an estimated $6 billion. The scheme was relatively simple in design, and should have
been easily detected at several levels. The key to the scheme was collusion on a grand scale.

Waste Management Inc. executives were essentially able to get all of the executives as well as
the external auditor on board. The fraudsters felt pressure to meet the earnings goals set by the
president and for Arthur Andersen partners, they felt pressure to keep the multi-million dollar
account. They had the opportunity because together they were in charge of everything and for
Arthur Andersen partners, they had the opportunity because they were trusted and respected as
an auditor. They were able to rationalize the fraud by agreeing to adjust the books later, when the
netting finally caught up and for Andersen, they convinced themselves that Waste Management
Inc. would honor their agreement and make the adjustments.
With the legs of the fraud stool in place things ran smoothly for seven years until an
ethical leader stepped in and broke up the collusion ring. Waste Management Inc. learned a
valuable lesson from the experience and rebuilt itself as an ethical environmental leader, with
strong management and continued success. Waste Management Inc. was actually the only Arthur
Andersen audit client involved in a fraud to survive the ordeal, and outlast even the auditor.
Arthur Andersen learned that creating too much documentary evidence is dangerous, and as a
result the firm participated in shredding parties the next time someone opened the books (Enron).
In many ways the Waste Management fraud was the beginning of the end for Arthur
Andersen. It was the firms first major fine, and it demonstrated a profound lack of professional
ethics. I think Bernie Sanders, independent senator from Vermont said it best at the WorldCom
congressional hearings, It appears very clear that Arthur Andersen failed in their audit of
WorldCom, you failed in the audit of Enron. It is incomprehensible to me that such a major
accounting firm can have such a dismal record (BBC news, 2002). Arthur Andersen provided
nearly all the research necessary to author the Sarbanes Oxley Act, and the Waste Management
Inc. case was one of the best examples of why SOX is so specific about auditor independence.

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