Waste Management, Inc. 1998 Fraud Scandal

Summary

Waste Management, Inc. is a wide-range waste company that was founded by Larry Beck in 1894. The company did not go public until 1971 but they were already generating approximately $82 million in revenue by 1972. They offered their services to millions of customers in America, Canada, and Puerto Rico. In the 1980's, Waste Management, Inc. became the largest waste management and environmental services company in the United States. Between 1992 and 1997, the company experienced multiple fraud crimes. There were several executives and senior officers involved with these crimes including the Founder and Chief Executive Officer (Dean Buntrock), Former President (Phillip Rooney), Chief Administrative Officer (Thomas Hau), Chief Financial Officer (James Koenig), General Counsel (Herbert Getz), and the Vice President of Finance (Bruce Tobecksen). 

The key fraud actions that happened was dodging depreciation expenses by assigning and inflating salvage values and extending the useful lives of the garbage trucks that the company possessed. The depreciation expense is required to be on the company's financial statement every year. It should state that the assets owned do not have their original value because they have been used. Another fraud action that happened with the accounting books was that the officers were not recording expenses for any decreases on the landfill values. Since they were doing this, it would ultimately state less expenses for any decreases of the landfill values. Then, the officers also rejected to record necessary expenses to write off the costs of unsuccessful projects for landfill development. All of this added up to the company being able to claim less expenses for the company when it should have been a massive amount more. Also, the officers allocated salvage values to assets that didn't have any salvage values before. Simply put, this would increase the residual value of an asset when it did not previously have any value. Waste Management, Inc. enlarged environmental reserves to dodge unneeded operating expenses, which completely removed operating costs of approximately $490 million. Another fraud activity (yes, there is more!) included the company not properly capitalizing a majority of expenses, which would would defer expenses on the company's books. Waste Management, Inc. even utilized geography entries to transfer millions of cash between randomized line items on their income statement. All together, they had profits that were falsified put into false assets, retained earnings, and all without an increase in liabilities on their financial statements.

I believe the craziest part of this scandal is that since the company is publicly traded, they were required to audit their accounting books. They hired Arthur Andersen, an accounting firm, to perform the audit. Here is the interesting piece, James Koeing, the Chief Financial Officer of Waste Management, Inc., was trained as an auditor at Arthur Andersen. He was a partner at Andersen for thirty years so he obviously had connections that were still in contact. Thomas Hau the Waste Management, Inc. audit engagement partner along with being the head of the Arthur Andersen audit division for the account of Waste Management, Inc. The Vice President of Finance at Waste Management, Inc., Bruce D. Tobecksen, was the audit manager of audits being done by Arthur Andersen including the Waste Management, Inc. audit. Initially, Arthur Andersen came in like any other auditor would and they were able to find many errors in the Waste Management Inc.'s accounting book and provided methods that could fix them. Waste Management Inc. was not planning on correcting their mistakes and decided to BRIBE Arthur Andersen to pretty much keep their mouth shut and let it all go. Arthur Andersen stupidly accepted this bribe and ignored the ongoing fraud to put a little money in their pocket. When everything came rolling downhill and the fraud was discovered, Arthur Andersen ended up being fined around $7 million for their part in the scandal. 

(Source: https://ensscpa.com/waste-management-inc-1998-fraud-scandal/, accessed 5/30/2019)

(Picture Source: https://www.slideshare.net/SaurabhMaloo3/accounting-scandal-waste-management-inc, accessed 5/30/2019)

How and Why Risk Management relates to the Fraud

You need to be able to understand what risk is to be able to manage it. Risk is simply put as the likelihood that a negative event can occur. Something as simple as walking on an icy sidewalk has risk involved since there is a chance that you can slip and fall on your butt! Once you have identified the risk, you have to determine a way to mitigate or avoid the risk, which is where risk management comes into the spotlight. On our example with the icy side, we can manage this risk by walking slowly and extra carefully. This will vastly reduce our chance of falling, which means we are able to get to our destination without hurting ourselves.

There are phases of risk management:

• Everything gets inventoried
• Locate threads on the inventory
• Determine what threats pertain to what assets
• Estimate impact of threats
• Take a look at mitigation alternatives or controls
• Analyze economics where they are applicable
• Some of these controls may be required by law 
• Deploy appropriate controls

You always have to begin with the assets because without the knowledge of the assets involved, it is not possible to do a risk analysis effectively. The assets that were involved with the Waste Management, Inc. fraud were the land fills along with the garbage trucks. They were not updating the accounting books with the decreases in value on the landfills and were dodging the depreciation expenses on the garbage trucks. The hired auditors, Arthur Andersen, actually did their job well when they were able to locate these risks on the assets and did report them up with mitigation alternatives. They provided executive management with adjustments and methods that would work towards mitigating the risks. The fraud was identified at Waste Management, Inc. and should have been to a stop there, but Arthur Andersen accepted a dirty bribe to turn their back on their responsibility as an auditor.

(Picture Soure: https://hpaudit.co.za/how-to-improve-risk-management-in-your-business/, accessed 5/31/2019)

What was the Threat?

In the Waste Management, Inc. fraud, there was a threat that is more common than most people even realize. This type of threat is called Insider Threat. Anyone within the company could be a potential insider threat. It could be someone with high level access controls on a database, an accountant performing financial reports, or even the security guard that buzzes you into the building. What makes them an insider threat is if they intend on performing malicious activities within the organization. 

There are three types of insider threats:

1. Malicious insiders - Personnel who use their power or access to impose damage on the organization.
2. Negligent insiders - Personnel who make mistakes or ignore company policies, ultimately creating risk in their organization.
3. Infiltrators - External personnel who acquire access to what they are not authorized.

Dean Buntrock, the founder and Chief Executive Officer, partook in a majority of the fraud which makes him a malicious insider. The whole Waste Management, Inc. scandal was just a sad effort to meet predetermined earning targets by increasing profits and avoiding expenses. When Dean Buntrock realized that the revenues were not matching up to what was going to be expected, he began to pursue fraudulent means to make it look like it was happening. Earnings for the Chief Information Officer and stakeholders depends upon company earnings, which was not looking well in their eyes. These types of cases make you open your eyes and realize that there can be an insider threat anywhere within an organization. 

(Picture Source: https://haystax.com/nispom-2-adds-insider-threat-rule-but-does-it-go-far-enough/, Accessed 5/31/2019)

What was the Vulnerability? 

A vulnerability can be simply defined as an asset (relationships, IT systems, hardware, data) that has a flaw that can be potentially exploited. The were a couple of vulnerabilities involved in the Waste Management, Inc. fraud and the first would deal with the comfortable relationship that Waste Management, Inc. had with the Arthur Andersen firm. Arthur Andersen continually issued audit reports that were unqualified from the company's falsified financial statements. The next vulnerability was allowing the Chief Executive Officer and the Chief Financial Officer to manipulate financial statements with "top-level adjustments", when they simply should have been approving the statements. 

The Cost

When the new CEO took over in 1997, he issued a review of the accounting practices for Waste Management, Inc. from 1992 to 1997. This review led to the restatement of financial statements of the company in February 1998. Waste Management, Inc. acknowledged that its pre-tax earnings were misstated by around $1.7 billion. At the time that this occurred, this was the largest restatement in corporate history. There are items that the restatement cost does not include which are things like lawyer fees, fines, and most importantly their reputation.

(Source: https://slideplayer.com/slide/12623332/76/images/5/TIMELINE+OF+EVENTS+%28+%29+1965+Solid+Waste+Disposal+Act+WM+goes+public..jpg, accessed 5/30/2019)
(Source: https://www.sec.gov/news/headlines/wastemgmt6.htm, accessed 5/30/2019)

The Controls

It is difficult to say what standard controls could have been put in place to prevent this fraud since the fraud was an inside job at the upper executive level. I believe there should have been a policy or procedure put in place when submitting the company's financial statements when it came to depreciation expenses and accounting books to catch that mathematical errors that were input. There is also the main concern that the CEO and CFO were manipulating the financial statements last minute to hide their fraud. There were improper segregation of duties and transaction authorization controls put in place to prevent these financial documentation alterations from being done behind closed doors. There shouldn't ever be a reason that a high level executive would need to change financial statement data after it having gone through multiple experts before reaching their desk. Another control that should have been put in place would have been to not allow Waste Management, Inc. to have a closely involved firm audit their company. There should have a stakeholder or member of the audit committee that saw their close relationship and requested a different firm to audit Waste Management, Inc.


Would a Risk Management Assessment have identified this?

I believe that if there was an adequate risk management assessment performed, it would have identified that many of pieces of this fraud puzzle could have been possibly been prevented. The risks would have been able to be identified and then the controls for them would have been put into review. They would have hopefully come out with the controls I previously mentioned, and hopefully a lot more. It's not surprising that complete risk management assessments were not done since the executives that usually partake in initiating them, were involved with the scandal.

In Closing

The Waste Management, Inc. should open everyone's eyes that fraudulent actions can be performed by anyone at any level of a corporation. There is mandatory training every year at companies like 'Cyber Awareness' and 'Fraud Prevention' to teach employees how to keep an eye out for these types of things. Not every executive was involved with the Waste Management, Inc. fraud scandal, so that means that there were several executives and stakeholders that turned a blind eye on the actions that were being taken by the Chief Executive Officer, Chief Financial Officer, and the others. The same thing can be said about Arthur Andersen since their firm reported invalid auditing reports that aided Waste Management, Inc. in continuing their fraud long after it was discovered. I can only hope that this blog post has influenced you to gain more knowledge on how to identify fraud within your own organization. For more information on this, here are a couple of websites that can assist you:

https://www.forbes.com/sites/forbesleadershipforum/2012/04/18/how-to-find-and-stop-fraud-within-your-organization/#c1929585b12b

https://i-sight.com/resources/41-types-of-fraud-and-how-to-detect-and-prevent-them/

(Picture source: https://www.worshiphousekids.com/childrens-worship-backgrounds/22630/see-you-next-week-1, Accessed 5/31/2019)