Waste Management Accounting Fraud Case

The auditors of Enron did fail in their task of providing a duty of care to all of the parties. The main reason for this is that they failed to correctly audit the assets and financial position of Enron resulting in all stakeholders having no clue about the forthcoming collapse of Enron. This resulted in the stakeholders facing a very critical condition or a phase where in they were not sure if they would be able to recover their investments and debts or not. The auditing process has revealed several issues and findings of problems within the accounting system and the same have been discussed as the primary areas of exposure, areas of possible mishandling of accounts

Dean Buntrock established Waste Management, Inc. in 1968. Its main purpose is to pick recycling and garbage up from residential housing and businesses. WM also disposes of the garbage in landfills. It has grown to be the largest garbage disposal company in the U.S. today. This company has managed to survive “one of the most egregious accounting frauds we have seen” said Thomas C. Newkirk of the SEC.

In large corporations the success or failure of the company is the responsibility of the board of directors. According to Richard DeGeorge, “The members of the board are responsible to the shareholders for the selection of honest, effective managers, and especially for the selection for the CEO and of the president of the corporation.” (p. 202). The board members have a moral responsibility to ensure the corporation is run honestly, in respect to its major policies, and to ensure the interests of the shareholders are satisfied. The next responsibility within a corporation is the responsibility management has to its board of directors. DeGeorge writes, “It must inform the board of its actions, the decisions it makes or the decisions to be made, the financial condition of the firm, its successes and failures, and the like.” (p. 202). The management of the corporation is morally obligated to

This subject company in this case study is WoolEx Mills. The top management team at the Mills had to act fast to prevent the accusations charged upon them, so that they may venture deep into the United States market. In the process, they had to act in a way that will present the company’s financial statements; cash flows in a way that they did not show any suspicious fraudulent activities. The type of fraud in this case study is known as manipulation of accounts which involves the act of offering the accounts in the way they are not in reality.

The beginning of the twenty first century marked the dawn of a new age, but with its arrival brought a chilling reality that saw the credibility of corporate America being sorely tested due to the scandals that rocked the foundation of capitalism at its heart and soul. This disconnects saw executive management and the board of directors at odds with shareholders and stakeholders over how to attain wealth accumulation while still creating an atmosphere of good corporate governance. This paradigm led some to question that if managers, who are the principal agents of the corporation, act in the best interest of the company or for themselves. Lord Acton once stated, “Power corrupts, and absolute power corrupts absolutely”. There were three specific corporate scandals that led to failed confidence in the financial sector and the subsequent legislation known as Sarbanes-Oxley Act of 2002 which attempted to address this malfeasance: Enron, WorldCom, and Arthur Andersen.

The WMI accounting fraud case described a financial fraud committed by senior management of WMI during the period of 1992-1997, with the help of Arthur Andersen their external auditing partners. The case depicts the effort of several years to inflate profits at WMI, employing aggressive accounting practices which enabled the WMI to conceal $1.7 billion in expenses (Riley and Rezaee, 12). By eliminating or deferring expenses, WMI managed to meet earnings targets and improve its share value. The fraud enabled the former top officials to enrich themselves in performance-based bonuses. Additionally, the case depicts a financial fraud committed by senior ranking executives at

“Audit committee members or their agents may proactively examine areas, functions, and personnel where collusive fraud risk is reasonably likely to be perpetrated,” (Zmags). The search for fraud, even if performed in the same location multiple times, may continue until the audit committee feels confident that they have ruled out the probability that fraud is prevalent. One of the biggest risks of fraud is management override of controls, requiring the extensive search for risk in, “journal entries and other adjustments and reviewing accounting estimates for possible biases that could result in material misstatements,” (Nysscpa).

Subsequently, the field of accounting has received more attention in recent years due in part to the increase in high profile, white-collar crimes involving the accounting practices of large corporations such as the Adelphia, Enron, and WorldCom debacles in the early 2000’s. The Association of Certified Fraud Examiners (ACFE) estimates that occupational fraud losses cost organizations $994 billion annually (“Report to the Nation, 2014). The accounting scandals, the growing occurrences of occupational fraud and the changing needs of the legal society are the driving force behind an

In light of recent global business scandals, corporate governance has become a significant topic. It can be understood as a dichotomy between the shareholders and the management of a company. Navigating this relationship is often problematic as the shareholders provide oversight while management makes daily executive decisions on their behalf. When managed appropriately, this balance between shareholders and management can result in improved efficiency, conflict resolution and a contribution to improving the standards and efficiency of the entire operation. This paper will examine the nature of both roles, how they often are in conflict and discuss the corporate ethics of this relationship. For a student of business organization, understanding how varying elements of a company resolve their issues is critical and can serve as a lesson that can be applied in other endeavors.

In the early 1990's, Waste Management, instead of just picking up the garbage, provided garbage to their investors in the form of an accounting scandal which cost investors approximately $6 billion (Bloomberg News) and was described by Thomas C. Newkirk, associate director of the SEC's Division of Enforcement as "one of the most egregious accounting frauds we have seen" (SEC). What Mr. Newkirk is

"Corporate Fraud"…when you hear those words the first, most recent incident, many think of is The Enron Scandal. This same scandal produced the Public Company Accounting Reform and Investor Protection Act of 2002. This much needed act created the Public Company Accounting Oversight Board under the Security Exchange Commission 's supervision. This board sets accounting standards and investigates Certified Public Accountants and companies to ensure they are following the guidelines set forth. This board has also been given the authorization to fine, suspend and recommend criminal investigations in the event CPA 's and their firms violate the standards. (Lindstrom) To understand the stringency of this Act is to recognize what brought it

Waste Management, Inc. (WMI) is a recycling waste company that was committed accounting fraud in the 1990s. According to the article “Accounting Firm to Pay a Big Fine” by Floyd Norris, WMI established a financial statement with their earnings goals to attract investors (2001). According to the litigation release number 17435 “Waste Management, Inc. Founder and Five Other Former Top Officers Sued for Massive Earnings Management Fraud” by the Securities and Exchange Commission (SEC), the company’s top management understated the operating expenses and overstated company’s revenue during a six-year period to increase their income (2002). The fraud lasted over five years due to the slow ethical action and collusion of Arthur Andersen LLP, the auditors of WMI (SEC, 2002).

While Waste Management continued to produce false numbers to the public, Buntrock used company money to make charitable contributions and present himself as a decent, ethical person (Securities and Exchange Commission: 2002). He received large amounts of money while he perpetrated the fraud, and his executive team was incentivized for their role as well.

Upper management abused their responsibilities by misstating financial records. Management manipulated earnings in order to make the numbers appear good so they will in turn receive a bonus. Companies such as Enron, WorldCom, and Global Crossing had a board of directors that simply were not doing their job of overseeing the financial reporting (Petra, 2006). Fraudulent activities were caused by conflicts of interest between the directors and executive officers. Accountants and auditors helped deceive the public by certifying that the financial statements were true and correct of fraudulent corporations. Incentives drove auditors’ behaviors to create this hidden fraudulent activity between the client and the auditor. The fear of losing the client almost guaranteed that the auditor would comply with the management’s decisions. Unfortunately, investors placed their faith in the auditors’ reports, which certified the net income was accounted for correctly. With the support of the auditors’ behaviors, these large corporations were able to hide the fraud for a long time.

Back in the 1990’s, HealthSouth became one of the largest healthcare service providers nationwide, with the earnings over the billions through several years. Due to the large investments made, it brought on the temptation of “cooking” the books to move money around to places it should not be. Management then began to put a plan together, to move small amounts at a time, so as not to be detected. “It was reported that HealthSouth was overstated investments by almost 5 billion, which made the average journal entry around $2,500.” (HealthSouth: A Case Study in Corporate Fraud – Arxis Financial, Inc.) Now I will explain further how the corruption occurred and the consequences of that end result.