A Waste (Management) Of A Wake-Up Call

 

Plenty of attention will be focused on the Brassica settlement, complete with navel-gazing contemplation of what it means for the future of the firm. Hey, I’m guilty of it myself – see yesterday’s post. And I’m sure I’ll do it again, maybe even before I finish this post.

Still, there are other interesting news nuggets out there. One of them: yesterday, the SEC settled fraud charges with four principal officers of Waste Management for a cool $30.8 million. The quartet included Dean Buntrock, the founder of Waste Management and its chairman and CEO for much of the time the frauds occurred. Waste Management, if you’ll recall was kind of the grand-daddy of the 1990’s accounting frauds – and an ominous precursor of Arthur Andersen’s fate. Andersen may have killed itself with Enron, but it didn’t cover itself with glory in its audits of Waste Management, either. And most obviously, Andersen’s managers didn’t learn many lessons from the Waste Management audits.

“The Commission alleged that, beginning in 1992 and continuing into 1997, defendants engaged in a systematic scheme to falsify and misrepresent Waste Management’s financial results with profits being overstated by $1.7 billion. The fraud resulted in a restatement in February 1998, which at the time was the largest restatement in history.” [Emphasis added.]

Think about it: Andersen doesn’t get tough on Waste Management monkeyshines over a five-year stretch. The result is the largest restatement in history – with profits overstated by nearly $2 billion. (In fact, if memory serves me correctly, there were multiple restatements.) And Andersen sleeps right through the wake-up call: Waste Management’s gig was up two and a half years before Enron self-destructed. There was enough time for Andersen to see how many rats were in its basement, but nobody bothered to open the door.

Some of the misdeeds charged against the four principals (which, of course, were settled without admission or denial):

– Waste Management manipulated its depreciation expense by extending the useful lives and overstating the salvage value of its trucks and containers, thus reducing current depreciation charges.

– The firm didn’t write off impaired assets; it improperly capitalized interest and other current expenses.

– The firm understated its income tax expenses, under-accrued reserves, gamed its acquisition accounting methods, and brought “cookie-jar” reserves into earnings.

The net effect of these maneuvers: increased current earnings while deferring costs. Tastes great, less filling – but what a hangover. Andersen got past its hangover, and partied on for a few more years. But that’s all. Perhaps there’s a reminder for KPMG’s managers in the timing of the Waste Management settlement with KPMG’s own: you just don’t get in trouble for taking the high road. It would be refreshing if someone got the message.