Control Failure Presentation Daniel Min MIS5121 REAL WORLD CONTROL FAILURE PROJECT

COMPANY BACKGROUND Waste Management, Inc. is an American waste management, comprehensive waste, and environmental services company in North America Services include waste collection, recycling and resource recovery and disposal service Founded in 1968 by Dean Buntrock & Wayne Huizenga, the company headquartered in the First City Tower in Houston, Texas Waste Management became public in 1971 Their sales doubled in a period of five years reaching $2 billion in 1985 In the early 1990s Waste Management Inc. became the leading company in its industry

CONTROL FAILURES Due to increased regulation of the waste management industry and failed international operations, Buntrock and a team of auditors from Arthur Anderson started finding ways of creatively adjusting the accounting records The scheme was accomplished through false and misleading disclosures and various violations of generally accepted accounting principles designed to defer current-period expenses Inflating income by 1.7 billion: Failing to report depreciation expense for the company`s garbage trucks Capitalizing their expenses Failing to establish proper reserves to pay for income tax

KEY PLAYERS Dean Buntrock, Founder & CEO Phillip Rooney, COO Set the earning targets Directed certain accounting changes The Spokesperson who announced the false numbers Phillip Rooney, COO Ensured that the required write-offs were not recorded Overruled accounting decisions that would have a negative impact James Koenig, CFO Responsible for executing the plan Ordered the destruction of evidence Misled the company`s committee and internal accountants Withheld information from outside auditor

TIMELINE OF EVENTS (1968-1998) 1965 Solid Waste Disposal Act 1971 WM goes public 1991-1997 Fraudulent accounting practices taking place within the company $1.7 Billion overstatement of earnings revealed in 1998 due to fraudulent accounting 1968 Arthur Andersen brought in as auditors 1996 Buntrock steps down as CEO 1998 Conclusion of audit findings

DISCLOSURE OF EVENTS The new CEO hired in 1997 ordered a review of the company`s accounting practices, which led to the discovery in 1998 of an overstatement of $1.7 billion in earnings between the years 1992 to 1997. It was one of the largest restatement known at that point of history Year Ending Original reported (in thousands) As restated % Overstated 12/31/92 $850,036 $739,686 14.9% 12/31/93 $452,776 $288,707 56.8% 12/31/94 $784,381 $627,508 25.0% 12/31/95 $603,899 $340,097 77.6% 12/31/96 $192,085 $(39,307) 100+%

RESULTS Shareholders lost more than $6 billion when stock prices dropped by more than 33% Waste Management was bought and merged with a smaller company, USA Waste Service Inc. in 1998 Waste Management had to pay $457 million in a class action suit to shareholders US SEC, Security Exchange Commission, fined Arthur Anderson $7 million Ethical standards became one of the most important element in the success of the business and in fact, in 2008 Waste Management was considered one of the most ethical companies

WHAT COULD/SHOULD THOSE AUTHORITY HAVE DONE DIFFERENT? Monitoring accounting and financial reports monthly to reassure that they are being done correctly Segregation of duties placed so that, for example, COO could not be able to overrule the accounting decisions Ethical training across the board of the company Hiring firmly regulated external auditing firms to keep track of financial statements

REFERENCES http://www.mindfully.org/Industry/SEC-Sues-Waste-Management26mar02.htm http://andylegan.blogspot.com/ http://ebooks.narotama.ac.id/files/Auditing%20After%20Sarbanes- Oxley%20(2nd%20Edition)/Case%20A.2%20%20Waste%20Management.pdf http://www.fundinguniverse.com/company-histories/waste-management-inc-history/ https://www.sec.gov/news/headlines/wastemgmt6.htm