Waste Management Accounting Scandal (Essay Sample)

Waste Management Accounting Scandal
Student's Name
Institution
Waste Management Accounting Scandal
Introduction
The biggest Waste Management Accounting Scandal occurred in the United States, which involved a publicly traded company dealing in waste management known as Waste Management Inc., which is based in the city of Houston. It was a hard hitting accounting scandal that had extensive, far reaching consequences on the Waste Company, as well as those involved with the company such as the company's employees and shareholders. The scandal was quite magnanimous, causing the government to take measures against such accounting malpractices, as congress passed an Act intended to cushion investors from such fraudulent activities involving accounting in business corporations. The Act passed is known as the Sarbanes-Oxley Act of 2002.
The Waste Management Inc. was founded back in 1971, to provide certain key societal services, mainly environmental and waste services. The company's accounting scandal began to take shape in 1997, when a discovery was made by a new management and a Chief Executive Officer, after going through the accounting books of the company. It emerged, after the new management team came in, that there had been massive misrepresentation of the company's financial statements from 1992. Financial fraud as well as the misrepresentation and falsification of the financial performances of the company were perpetrated by the management of the Waste Company during this period (Parella, Waldon & Bedosky et al., 2013).
The key officials that were involved in this accounting scandal, which became the biggest financial restatement in American corporate history, included Dean L. Buntrock; Waste Management Inc.'s Board of Directors' chairman, founder and Chief Executive Officer; Phillip B. Rooney, who was the company's president and Chief Operating Officer; James E. Koenig, who was the company's executive vice president as well as the Chief Financial Officer; Herbert Getz, who was the company's senior vice president, secretary and general counsel; Thomas C. Hau, who was the company's vice president, chief accounting officer as well as the corporate controller and finally Bruce D. Tobecksen who was the company's vice president in charge of finance. Also key in the perpetration of the scandal was the company's auditor, Mr. Arthur Andersen, who expressly aided and abetted the ongoing fraudulent financial misstatements and improper expenses recordings among other issues (AICPA, 2005).
A closer scrutiny of the company's financial operations between 1992 and 1997 indicated a pattern whereby the management of the company had a number of earning targets projections set, and when the company's revenues were not as huge as expected in the set earning projections. This resulted to a problem arising where the management thought that it could only be solved by employing some activities that would "lower" the expenses in a bid to offset the unexpected lower revenues realized. Therefore, the accounting fraud and malpractice was geared towards meeting predetermined company earnings targets. This is the genesis of the accounting fraud that would rock the waste management company, as well as affect American citizens, shareholders and even investors, eventually leading the government and congress to act (Sinthu, 2012).
In the perpetration of the accounting and financial fraud by the top management of the Waste Management Inc., the people involved carried out some activities that ensured the fraud succeeded. Notwithstanding, this helped to reap shareholders and investors a substantial amount of their investments with the company. One of the activities that Waste Management Inc.'s management engaged in was purposefully avoiding recording a number of expenses that ought to have been recorded. Some of these expenses were of necessity in the writing-off of abandoned and unsuccessful landfill development project's costs. Furthermore, the management of the company failed to establish the required and sufficient amount of reserves, which were needed in order to pay for other company expenses inclusive of income tax (AICPA, 2005).
Another activity carried out by the Company's top brass, in a bid to facilitate the fraudulent accounting reign they were thriving in, was the establishment of environmental reserves. These reserves were highly inflated despite the fact that they were required for acquisitions. In this way, the excess reserves from the inflated figures were supposed to be utilized in order to ensure the avoidance of unrelated operating expenses' recording. Consequently, a variety of expenses of the company were capitalized in an improper way, to enable the accounting fraud take place (Sinthu, 2012). Because of the company's rather slower growth in terms of profits and revenues as to meet the various targets, earning's inflation was conducted in an improper manner. This prompted deferral as well as elimination of expenses in the financial years in question.The company also did employ netting tactics, which were utilized in order to eliminate current period operating expenses of about $490 million as well as the elimination of accounting misstatements from prior periods. This was accomplished through a series of offsets against one time exchange or even sale of assets that were not related in any way (Parella, Waldon & Bedosky et al., 2013).
Another technique that the Waste Management Inc. used in the perpetration of the accounting scandal was the increase on the depreciable assets of the company's useful life as well as salvage value. This was affected in order to ensure a fervent bid to have reduced depreciation expenses amount incurred by the company each year of operation. Yet again, this increase was implemented in order to reduce the capitalizing costs of the Waste Company, which ought to have been expensed. The increase of the depreciation time length by the Company was done for the Company's property as well as equipment and plant on the company's balance sheets (AICPA, 2005).
With the company's earning's statements becoming more and more public, the esteemed shareholders as well as investors in the company lost lots of money; approximately $6 million in their investments market value.One of the biggest loophole's through which the accounting scandal took place and succeeded involved Waste management Inc.'s auditor, Arthur Andersen. Mr. Andersen did provide for the company continued unqualified auditory opinions on the financial statements of the Waste Management Inc. The result of these audit opinions was that people within the company outside the scam perpetrators loop, investors, the general public and also the US government authorities believed that Waste Management financial statements were in order and devoid of any irregularities or misstatements of any sort (Parella, Waldon & Bedosky et al., 2013).
However, despite providing somewhat unqualified audit opinion on the company's financial statements, it is important to observe that Mr. Andersen identified and brought to the attention of Waste Management Inc.'s top management the company's various improper techniques used in the accounting department and as a means of reconciling these accounting errors. He proposed to the company Proposed Adjusting Journal Entries (PAJEs). Nevertheless, despite all these accounting recommendations offered, the company did not heed any of the advice given. Interestingly instead, the management of the company struck a deal with Mr. Andersen for the write off of the accounting errors that had accumulated over time since the accounting scandal began. Hence Mr. Anderson had no choice but to agree to the company's management's demands by co...