Waste Management Fraud Scandal 1998

588 words | 2 page(s)

Corporate atrocities are some of the defining events in the business world. The Waste Management fraud scandal happened in 1998 and involved one of the world’s largest auditor company. This paper aims to discuss the scandal by providing some general information about the company, describing the fraud occurrence, examining the financial impact of the fraud, as well as making recommendations on what could have been done to prevent it.

Waste Management Incorporation is an American publicly traded waste management company with headquarters in Houston, Texas. It was founded 50 years ago in Chicago, Illinois. The company’s founder, Wayne Huizenga, worked as a traveling salesman for a Chicago small garbage collection agency for several years. In 1962, he borrowed $5,000 from his father, for which he bought a garbage truck and part of the client base from the firm he worked in. In 1968, he and Dean Buntrock created a conglomerate based on the old business. Today, WMI is a diversified corporation that deals with collection and disposal of waste, the development of alternative energy, and R&D for the modernization of hazardous enterprises. As of 2017, it had over 40,000 employees, 26,000 vehicles, nearly $15 billion in revenue and $2 billion net income as of 2017. The business provides its services to over 20 million clients across the USA, Canada, and Puerto Rico.

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The fraud occurred in 1998. The new CEO and management examined the financial documents and company registers and found out the fact of abuse. New auditors recalculated the performance of the corporation over the previous five years and found out that the company had inflated its net profit for a total of $1.7 billion the whole time. The company falsely overestimated the useful life of its fixed assets, thus underestimating depreciation expenses, and overstated the residual value of such assets. The primary players of the scandal were founder and CEO Dean Buntrock, former head Phillip Rooney, CFO James Koenig, Chief Legal Counsel Herbert Getz, and Vice President of Finance Bruce Tobecksen. The auditing company was Chicago-based Arthur Andersen, one of the largest auditing firms in the world at that time. In particular, it was one of the so-called “The Big Five” group.

A year later, the United States Securities and Exchange Commission (SEC) secured a criminal case against Waste Management Incorporation and its administration, including Buntrock, on suspicion of fraud. Besides the replacement of top executives, exposure of false financial results led to a significant decrease in stock price. Chiefly, due to the drop in stock price by over a third, the shareholders lost over $6 billion in the market value of their investments. In 1999, discouraged shareholders filed a class action lawsuit against the company and its several officers for providing misleading statements. In 2003, the case was closed by a pre-trial agreement. Shareholder action for $457 million was satisfied. Buntrock was acquitted and resigned. Furthermore, another $7 million was due from the independent auditor, Arthur Andersen Company.

Many things should have been done before to prevent the fraud or at a minimum detect it much earlier. It is an amusing fact that after the scandal, the new head of the company A. Maurice Meyers introduced a telephone trust line through which company employees can anonymously report deceitful or unacceptable conduct. Also, Buntrock had the unlimited authority and control to conduct the fraud. He might not have managed to use that scheme had the board of directors been classified. Finally, employees of the company could have prevented fraud in the company by informing the relevant government authorities about it. This would have helped to stop the crime much faster, reducing the damage.

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