[Music]

this is a topic we don't normally want

to talk about but the garbage can on the

curb watched the truck take it away and

it's out of our lives do you know waste

management maybe you've seen their name

on the side of some trash cans or

dumpsters they have that green and

yellow logo well they're the main

company in the united states that deals

with our trash they take it from

businesses residential areas have

contracts with the cities bring it to

transfer stations and compact it but it

ultimately ends up in landfills of which

they own and operate more than anyone

else in the united states the industry

has been consolidating but they seem to

be the ones coming out on top of it they

reported almost 18 billion dollars in

revenue in 2021 and i think we can

believe that number but in the past well

this is a statement released by the sec

in 2002 the securities and exchange

commission filed suit today against the

founder and five other former top

officers of waste management

incorporated charging them with

perpetrating a massive financial fraud

lasting more than five years the

complaint filed with the us district

court in chicago charges the defendants

engaged in a systematic scheme to

falsify and misrepresent waste

management's financial results between

1992 and 1997. this is also from it our

complaint describes one of the most

egregious accounting frauds we have seen

for years these defendants cook the

books enriched themselves preserved

their jobs and duped unsuspecting

shareholders let's go back to the 1950s

this was a different time even when it

came to waste collection i guess you can

say it was a much smaller and simpler

industry back then there wasn't nearly

as much waste being produced compared to

today and to reflect that the

regulations concerning where and how to

dispose of it were much more relaxed

since it wasn't a big deal garbage was

usually taken care of by the town or the

city or in some cases there were small

private companies that would do it but

in the 1950s is when the industry

started expanding because all of a

sudden there was way more garbage being

produced this was right after world war

ii there was a baby boom happening so

the population was expanding at an

incredible rate and the economy was

strong so everyone was buying things and

the things people were buying were now

packaged in these disposable containers

combine all these factors and you have

yourself a lot of garbage in 1956 there

was a small garbage collection company

called a scavenger the original founder

had just died and it was taken over by

his son-in-law dean buntrock at the time

they were only operating 12 garbage

trucks around the chicago area but bunt

rock took notice of the new potential in

the industry to take advantage of it he

invested heavily in expanding this

business all the ways you would expect

buying new trucks and making deals for

garbage collection in new areas even

acquiring some of their smaller

competitors in 1965 the government

responded to this nationwide increase of

trash production and the impact of it by

passing the solid waste disposal act of

1965 without getting into the specifics

of it it basically provided some

stricter rules when it came to

collecting and disposing of garbage

there were now higher standards that had

to be met which meant there were higher

costs for everyone in the industry and

if you couldn't afford them well that

was it it was sinker swim time and only

the larger more professional put

together companies survived luckily a

scavenger spent the last decade

expanding so they made it a couple years

later they merged with another similar

company and the resulting company was

called waste management this was

obviously a situation where only the

strongest survived waste management knew

it and they did everything they could to

grow stronger in 1971 they had an

initial public offering that brought in

money that they immediately used to

start acquiring competing companies they

bought 90 smaller trash hauling

companies in 1972 from there they landed

some contracts from other countries to

start taking care of their garbage they

started getting involved in the disposal

of chemical and toxic waste on which the

government was making new regulations in

their first year of operation as waste

management in 1968 their revenue was 5.5

million compare that to the early 80s

when it was now hovering around 1

billion in the 1980s they were involved

in a line of scandals that involved

dumping hazardous waste in illegal

places now the accusations run much

deeper but they admitted to doing this

in a site in ohio and another one in

alabama which resulted in millions of

dollars in fines a sharp decline in

their stock price and a lot of negative

publicity but that's not even the

scandal i want to talk about they

actually made a pretty quick recovery

from it i just mentioned it right here

so we can get an idea of who we're

dealing with here in the early 90s after

years of mostly non-stop growth and

success they finally started

experiencing some major financial

troubles there's a few internal and

industry-wide reasons we could blame

ford but i think the simplest and

quickest way to explain it is it was a

weaker economy people weren't buying as

much stuff so they were producing less

garbage and businesses weren't making as

much stuff and that also means less

garbage in 1993 the revenue fell for the

first time ever and profits were down

do you know when you're a kid and you

get a bad grade so you're afraid to tell

your parents about it i mean what can

you do you didn't do well so you have to

go home and face the music or if you're

a little unethical you could skillfully

pull out your red marker and change that

grade this is essentially what waste

management did every year from 1992 to

1997. i don't know if you're familiar

with the stock market but if your

earnings come in below expectations it

is not good for your stock price and

it's not good for the company in general

they definitely had pretty big

motivation to lie about their earnings

but it's not as simple as changing that

final number with a red marker here are

some of the things they did to make it

appear that they were doing better than

they actually were as the sec put it

they avoided depreciation expense on

their garbage trucks by assigning

unsupported and inflated salvage values

and extending their useful lives this is

a big one so let me explain when you buy

an asset such as a garbage truck you

capitalize it meaning it's not an

expense right away it's expensed

gradually as it depreciates to figure

out how much you depreciate it each year

you take the purchase price which is

what you paid for it subtract the

estimated salvage value which is what

you think you can get for it once you're

done with it and then if you're using

the straight line method you divide that

number by the number of years you expect

it to be useful i know that was a lot

but just a made-up example say they

bought a garbage truck for fifty

thousand dollars and expect to use it

for five years and estimate they can

sell it for ten thousand dollars once

they're done with it so the accountant

over at waste management takes the cost

fifty thousand dollars subtracts the ten

thousand dollar salvage value and

divides that over the five years

resulting in an eight thousand dollar

depreciation expense each year that's

how it should be but then we have this

crooked management team over here is

saying forget the ten thousand dollar

salvage value just say we can get twenty

thousand i know we can't but just say

that we can reworking the calculation

with the new number gives them a six

thousand dollar depreciation expense

each year which is two thousand dollars

lower than it was before and effectively

adds money to their earnings that

shouldn't be there same thing with

extending that useful life change that

five years to ten years that six

thousand dollar expense is now down to

three thousand they have now

fraudulently increased these earnings by

making these little adjustments and very

similar they also assigned arbitrary

salvage values to other assets that

previously held no salvage value i

failed to record expenses for decreases

in the value of landfills that they were

filled with waste refused to record

expenses necessary to write off the cost

of unsuccessful and abandoned landfill

development projects this one is

interesting it's a classic case of

improperly capitalizing expenses see

they would start making a landfill which

is an asset not an expense since it'll

provide future benefit but then they'll

abandon the project since there's no

future benefit to anyone anymore it's no

longer an asset and should now be

expensed but of course expensing it

would lower their earnings so they keep

it as an asset and just attach that

value to a different landfill they

established inflated environmental

reserves liabilities and connections

with acquisitions so that the x's

reserves could be used to avoid

unrelated operating expenses and

properly capitalized a variety of

expenses in addition to that one i

already mentioned failed to establish

sufficient reserves liabilities to pay

for income taxes and other expenses

however much of that you retained just

realized that this is all illegal and it

was done to make their income look

higher than it was here's a table

showing how much they originally stated

in earnings compared to the amount that

they restated so basically how much they

lied and said they made compared to how

much they actually made in my comparison

where that kid changed his grade and

lied to his parents that was basically a

victimless crime i mean it was hurting

himself in the long run i guess but this

had actual victims think of the

investors the people who bought stock in

waste management over this time it's

hard to decide which stock to buy

looking at all the information and

determining who's doing well and who's

gonna grow and where you can make the

most money well one of the big tools

that people use to make this decision

aren't these numbers there were people

in 1996 who did their homework they saw

that waste management made 192 million

dollars that year and decided to buy

their stock based on that information

when in reality they lost 39 million

it's not right and consider that number

was guaranteed to be accurate backed by

the company and verified by an

independent auditing firm in this case

it was one of the big five firms arthur

anderson who you may recognize from the

much more famous enron scandal here's

what happened i guess arthur anderson

would come in and perform their audit

verify all the numbers and tell waste

management hey we found some

irregularities and you need to make

these adjustments before we can sign off

on this and then waste management would

come back and say yeah just sign off on

that and we'll deal with all that later

amazingly arthur anderson agreed to that

and gave them an unqualified opinion

which i know doesn't sound good but it's

actually the best opinion you can give

turns out there were conflicts of

interest going on and arthur anderson

would make more money keeping them as a

client it was all crooked the same thing

happened year after year there is plenty

of blame to go around here but the man

thought to be the most responsible for

all this was the ceo chairman of the

board and founder that we discussed

earlier dean buntrock as the sec says

he's the one who set earnings targets

maintained a culture of fraudulent

accounting personally directed certain

accounting changes be made to make

targeted earnings and was the

spokesperson who announced these

earnings to the public all of these lies

made the company appear much better than

it actually was but they also benefited

him personally the sec estimates that

he's gained more than 17 million dollars

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

it's it's just inexcusable the results

well arthur anderson paid a 7 million

penalty which was the largest ever

against an accounting firm in addition

to 220 million that they agreed to pay

with waste management to sell

shareholder lawsuits waste management's

management team agreed to pay over 30

million dollars to the sec most of which

came from bunt rock there were penalties

and fees and settlements paid all around

but that's the extent of the

consequences obviously today the

company's back on their feet and doing

better than ever waste management that

is not arthur anderson i have a video

about enron if you want to hear more

about them but first let me know in the

comments what do you think of this whole

thing as i said i think it's just

inexcusable i'm curious have you ever

heard of this scandal because i feel it

gets overshadowed by enron and some of

the others going on at that time but

this was big we have new laws in place

to prevent this so i like to think that

accounting scandals of this magnitude

are a thing of the past but they're

important to look back on and i'm glad i

was able to shine some light on the

scandal that shouldn't be forgotten and

of course let me know any other thoughts

you have about any of this i'd like to

hear what you have to say thank you for

watching

[Music]

you