This project describes the fraud of a company back from the year 1998. This describes how the fraud was made and what steps were taken towards it. It also shows the persons involved in the fraud.

1. REPORT ON FRAUD OF WASTE MANAGEMENT INC. 1998
Project of Auditing

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PROJECT REPORT ON WASTE MANGEMENT FRAUD 1998
Priyom Majumder | B. Com (Hons.)
Bachelor of Commerce, 2016 Batch – ITM University, Gwalior
INTRODUCTION
Waste Management Inc. is a comprehensive company that was founded in
1894 in North America by Larry Beck. The company went public in 1971 and
by 1972; the company was generating about $82 million in revenue and had
made 133 acquisitions. The company offered environmental services to almost
20 million customers in America, Canada, and Puerto Rico. In the years of
1980s, Waste Management Inc. acquired Service Corporation of America, which
led Waste Management Inc., to become
the largest waste management and
environmental services company in the
country. It was able to manage millions
of tons of materials in different facilities.
Waste Management, Inc. experienced
many fraudulent crimes within its
company between the years of 1992 and 1997. The senior officers at Waste
Management, Inc., which included Dean Buntrock (Founder and CEO), Phillip
Rooney (Former President), Thomas Hau (CAO), James Koenig (CFO), Herbert
Getz (General Counsel), and Bruce Tobecksen (Vice President of Finance),
began to engage in fraudulent activities involving the company’s accounting
books. One of the fraud activities that occurred was avoiding depreciation
expenses by assigning and inflating salvage values and extending the useful
lives of the garbage trucks that the company owned. Every year, depreciation
expense must be included in a company’s financial statements as the assets
owned become used up and do not have the same value as it originally had.
Moreover, another fraudulent activity that occurred with the accounting books
was how the officers were refraining from recording expenses for any decreases
in the value of the landfills. By doing this, it would state fewer expenses for the
company, when in reality, there should have been more added for this. Next,
the officers also refused to record necessary expenses to write off the costs of
unsuccessful and discarded landfill development projects. This, in turn, stated

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fewer expenses on the company’s financial statements. In addition, the officers
assigned salvage values to assets that previously had no salvage values
whatsoever. In other words, this would extend the residual value of an asset
that originally did not have any. Waste Management, Inc. also increased
environmental reserves to avoid irrelevant operating expenses. Netting helped
eliminate about $490 million for operating expenses. Another fraudulent
activity included improperly capitalizing a variety of expenses. This would defer
expenses paid on the books. The company also used geography entries to move
millions of dollars between the various line items on their income statement.
Ultimately, the company had false profits moving into retained earnings, false
assets, and no increase in liabilities on their financial statements. In 1998,
Waste Management, Inc. restated its 1992-1997 earnings by $1.7 billion, which
made it the largest restatement in history. This created the Waste
Management, Inc. 1998 fraud scandal as it is known today.
Although, Waste Management Inc., with the help of auditor Arthur Anderson,
was investigated, charged with a suit, and required to restate their financial
statements, the company operations. Today the company is still serving their
clients and the public with waste services such as recycling and disposals.
Although they suffered consequences due to their five-year period of fraudulent
reporting, the company was lucky enough to recover from the losses and
charges filed against them. Waste Management Inc. is operating in North
America and is the Largest Solid Waste provider in North America and is
providing to more than 50,000 people in North America.

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19 Company Comparison Group
American Electric Power Entergy NextEra Energy Southwest Airline
Avis Budget FedEx Norfolk Southern Sysco
Baker Hughes Grainer (WW) Republic Services Union Pacific
C.H. Robinson WW Halliburton Ryder System UPS
CSX Hertz Global Holding Southern
12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17
Waste Management, Inc. $ 100 $ 138 $ 163 $ 174 $ 238 $ 296
S&P 500 Index $ 100 $ 132 $ 151 $ 153 $ 171 $ 208
Dow Jones Waste &
Disposal Services Index
$ 100 $ 125 $ 142 $ 148 $ 179 $ 210
43%
48%
27%
34%
65%
46%
0% 20% 40% 60% 80%
Net Revenue
Operating Income
Total Assets
Total Equity
Total Employees
Market
Capitalization
0
50
100
150
200
250
300
350
2012 2013 2014 2015 2016 2017
Comparison of Cumulative Five Year Total Return
Waste Management
Inc.
S&P 500 Index
Dow Jones Waste &
Disposal Services
Index
Company Size Comparison (2017)

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WASTE MANAGEMENT, INC SCANDAL 1998
The Waste Management, Inc. faced many difficulties throughout its journey. It
is true that not good business could survive with poor management and team,
and when the greed is about money and market capitalization then this is
almost true. The same happened with the Waste Management Inc.; they
withstood many fraudulent activities from 1992 to 1997. The company’s
biggest fraud was detected in 1998 and would be ever known.
The reason why the Waste Management, Inc. 1998 scandal occurred was in an
attempt to meet predetermined earnings targets by expanding profits and
pushing down or foregoing expenses. Revenues were not increasing as fast as
they should have been. The chief officers recognized this and began to commit
fraudulent activities as aforementioned in order for their financial statements
to state what they wanted them to state. In a company such as Waste
Management, Inc., officer compensation is tied to the earnings that the
company produces. If Waste Management, Inc. were to struggle in falling short
of their earnings target, it would endanger the officers of the company. The
stakeholders, in turn, looked to committing fraud in order to protect their own
lives. Compensation tied to earnings brings about a major culture of fraud in
any occupational environment. These officers had the opportunity to commit
fraud within the company’s financial statements because they were all high up
in the hierarchy of the organization. The founder and CEO, Dean Buntrock,
initiated a lot of the fraud and he himself was the company’s own founder.
Buntrock, along with the other stakeholders, let greed get in the way of
operating the company in an honest and efficient manner.
5.5 17
382
1200
2000
6030
7500
0
1000
2000
3000
4000
5000
6000
7000
8000
1968 1971 1979 1985 1986 1990 1991
Revenue(inmillions)
Annual Revenue for Waste Management, Inc.

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Because Waste Management, Inc. was a publicly traded company, the company
was required to audit their accounting books. They hired Arthur Andersen, one
of the Big Five firms, for the audit. Arthur Andersen found errors in Waste
Management, Inc.’s accounting books and would come up with adjustments
and methods in which they could be fixed; however, the Waste Management
Inc. officers refused to make those adjustments that Arthur Andersen
proposed. In order for the fraudsters to cover their tracks, the stakeholders
bribed Arthur Andersen by telling them that they would receive additional fees
outside of the agreement that they originally had made. Arthur Andersen, in
turn, issued unqualified opinions in the audit report for Waste Management,
Inc. and wrote off the accounting errors over time in order to conceal the fraud.
Not only was Waste Management, Inc. committing fraud with their accounting
books, but now they were also committing illegal acts by bribing Arthur
Andersen.
In fact, Arthur Andersen was not just any sort of auditing firm to the
stakeholders of Waste Management, Inc. James Koeing, who was the CFO of
Waste Management, Inc., was trained at Arthur Andersen as an auditor.
Thomas Hau, who was the CAO of Waste Management, Inc., was trained at
Arthur Andersen as an auditor, was a partner there for 30 years, was the
engagement partner for the Waste Management, Inc. audit, and was the head
of the Arthur Andersen audit division for the Waste Management, Inc. account.
Bruce D. Tobecksen, who was the Vice President of Finance at Waste
Management, Inc., was the audit manager of the Waste Management, Inc. audit
and others at Arthur Andersen. These important chief officers at Waste
Management, Inc. all came from Arthur Andersen, who was the company in
charge of the audit of Waste Management, Inc. According to the article
“Accounting Fraud Rising” by CNN Money, an SEC regulator mentioned that
“the relationship is too cozy” between Waste Management, Inc. and Arthur
Anderson. According to the article, much of the pressure that the accountants
have stems from the cozy relationships that firms have with corporate clients.
The article states that, “corporations often hire accountants and other
personnel from their auditors and accountants”. This cozy relationship between
both companies created conflicts in the auditing process of Waste
Management, Inc. The stakeholders of Waste Management, Inc. were able to get
away with a lot of their fraud because of who their auditor was, in which the
relationship between both companies was very close. Arthur Andersen ended
up being fined $7 million for the entirety of the Waste Management, Inc.
scandal.
How was the Fraud Committed?
The first step the company’s management took to manipulate with the data of
the company’s profit was manipulated the depreciation accounting. The
depreciation charged on the assets was much lesser than the normal
depreciation rate. The management showed an extended life of the assets and
also the salvage values was shown higher than the usual value. The salvage

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values were assigned to the assets that had no resale values. As a result of this
the company’s profits increased and a false data was presented before the
stakeholders of the firm.
The second step that was taken by the management team was not recording
the expenses. The decreased value of the landfills was not recorded in the
books and also the cost of unsuccessful landfill development projects was not
recorded. The result of this was that the stakeholders were informed that all of
their investments would yield a better value in the future and thus the
company was increasing its market capitalization by inviting more and more
share subscriptions.
The third manipulation that took place was with the reserves of the company.
The company used to show higher value of reserve that is transferred than the
actual value of transfer of reserve. The result of showing the excess of reserves
was to avoid the recording of unrelated operating expenses. The company
therefore was able to raise its profit and loss account scenario. The profits and
loss statement represented a better picture of the company because of which
their share prices increased from $10.87 to $38.13.
And the final step that was taken by the top management to improve the
picture if the companies profit and revenue generation was capitalizing various
improper expenses. The expenses that were not of capital nature were treated
as capital expenditure. They used “top-level adjustments” to reduce expenses
and inflate earnings. They also used accounting manipulations known as
“netting” and “geography” to make the results appear better than they were.
The executive of Waste Management used netting to eliminate $490 million
expenses and prior accounting misstatements by offsetting them against
unrelated gains, like the sale or exchange of assets. They also moved tens of
millions of dollars between items on the income statement to make it look good
and harder to check the stated amount.

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Role of Auditor in the Fraud:
The auditing firm Arthur Andersen was aware of the fraud statements of the
company. The firm advised the Waste Management, Inc. about those
misstatements and also requested for the change in the statements. But in
spite of his suggestion the management didn’t change the financial statements
fraud. Rather than they bribed the auditor. The stakeholders bribed the
company Arthur and Anderson for they had their own involvement in it. The
companies CAO, Mr. Thomas C Hau was responsible for the auditing results
and was the head of the audit committee. He was also involved in the fraud.
Becoming greedy with the extra income, Arthur Andersen issued unqualified
audit report. The auditor earned additional fees of $17.8 million as “special
work” from the company.
Accounting Standards that were violated:
i. AS 1: Disclosure of Accounting Policies
a. Standard Policy: Financial Statements should disclose all
“material” items, i.e., items the knowledge of which might influence
the decisions of the user of the financial statements.
b. Company Practice: The netting tactic allowed them to eliminate
almost $500 million in operating expenses from the financial
statements, by “offsetting them against unrelated one-time gains
on the sale or exchange of assets.”
ii. AS 6: Depreciation Accounting
a. Standard Policy: The method of depreciation is applied
consistently to provide comparability of the results of the
enterprises from period of period.
b. Company Practice: The Company significantly decreased the
depreciation expenses on their garbage trucks, by extending useful
lives and changing salvage values.
iii. AS 10: Accounting for Fixed Assets
a. Standard Policy: Due to the nature of landfills, GAAP also
requires that a company compare a landfill’s cost to its anticipated
salvage value, with the difference depreciated over the estimated
useful life of the landfill. Only expenditure that increases the
future benefits from the existing asset beyond its previously
assessed standard of performance is included in the gross values.
b. Company Practice: The Company did not account for the
decrease in value of their landfills were constantly being filled with
the waste. The company also improperly capitalized certain
expenses that should not have been capitalized. For example, they
did not expense the costs of abandoned landfill development
projects that were unsuccessful.

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The Frauds Effect:
The company Waste Management, Inc. continued its job with the help of the
auditing firm Arthur Andersen i.e. misstating its profit and showed it over-
valued. In 1997 the company hired a new CEO, who ordered for a review of the
accounting statements of the company. This led to the discovery of the biggest
fraud of then of near about to $1.7 billion. Overstatement of the company’s
revenue from 1992 to 1997 was about $ 1.7 billion. It was the largest
restatement known at that point of the history. The overstated value and
restated values are as follows:
Year Ending Originally Reported
(In Thousands)
As Restated
(In Thousands)
%
Overstated
31 December 92 $850,306 $739,686 14.90%
31 December 93 $452,776 $288,707 56.80%
31 December 94 $784,381 $627,508 25.00%
31 December 95 $603,899 $340,097 77.60%
31 December 96 $192,085 $(39,307) 100+%
Effects of the Fraud:
i. Shareholders lost more than $6 billion when stock prices dropped by
more than 30%.
-100000
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
1992 1993 1994 1995 1996
Originally Stated
Restated Amount

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ii. Waste Management was bought and merged with a smaller company,
USA Waste Services Inc. in 1998.
iii. Waste Management had to pay $457 million in a class action suit to
shareholders.
iv. Arthur Andersen was fined $7 million.
v. In 2005, the fraud accounting lawsuit against the former executives
was settled for $31 million.
vi. The men banned from serving as officers and directors of a public
company.
Fig: Share prices dropped after the fraud
LEARNING OUTCOMES
As a fraud examiner on this case, there are several recommendations I would
propose to Waste Management, Inc. The first thing I would recommend would
have been to hire a new Certified Executive Officer. The current CEO was
committing fraud in the company. He was committing fraud by letting greed get
in his way by tying his compensation and the company’s earnings together. As
the CEO of Waste Management, Inc., he has the ultimate authority on
management there. If he was managing the company in this way with the
financial statements being misstated, a new CEO would have greatly benefited
Waste Management, Inc. This new CEO would not allow the company’s
earnings to be so intertwined with the officers’ compensation.
Another recommendation I would have would be to hire a different auditor that
did not have such as cozy relationship to the officers of Waste Management,
Inc. as Arthur Andersen did. Another auditor would have told Waste
Management, Inc. what adjustments need to be made to the financial
30% drop in share prices

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statements, and Waste Management, Inc. would have to follow them without
bribing the auditor in any way. Computer software that traced that adjustment
would have been beneficial. Constant audit checks of the financial statements
would have aided in avoiding the fraud that occurred as well. Other internal
controls should have been instituted. Another auditor would have seen several
red flags within their audit of Waste Management’s financial statements.
Another auditor would have seen that the earnings were consistently meeting
the predetermined earnings target. They would have seen that millions in
expenses were written off. In addition, another auditor would have seen that
there were a lot of outdated fixed assets that Waste Management, Inc. held in
their possession.
Another way of recognizing the fraud was evaluating the real value of the assets
of the company. The sudden increase in the share prices of the company must
have been a point of attraction for the shareholders to look into the reasons
behind it. Being the owner of the company the shareholders had the right to
ask the management about the workings of the firm. This would have helped
them in not losing the $6 billion. If the actual market price of the assets of the
company was evaluated then the companies malpractice would have been came
into public earlier.
In order to eliminate the opportunity factor of fraud, other officers such as the
CFO and CAO that have more direct influence on the financial statements of
the company would have had to be replaced, since they were all in on the
committing of the fraud at Waste Management, Inc. In order to prevent the
fraud in terms of the incentive factor, compensation and the company’s
earnings should not have been intertwined. That is what created a culture of
fraud within Waste Management, Inc. additionally; the attitude factor of fraud
that included meeting high profits and earnings would have to be eliminated.
This would create an incentive for people working at Waste Management, Inc.
to create fraud since that attitude of earning high profits and earnings has
been instilled in their minds. With it eliminated, people at Waste Management,
Inc. would be opposed to creating any sort of fraud.