FINANCIAL STATEMENT FRAUD

Financial Statement Fraud Report for Waste Management Company

Financial Statement Fraud Report for Waste Management Company

Description of the Case

Waste Management, Inc. is a North American public company with operations in solid waste management, environmental services, and comprehensive waste disposal. During 1997-1998, the company encountered a serious accounting (financial statements) fraud. The scandal resulted in sharp stock price devaluations. Upon investigations, the top executives of the companies got replaced. The fraud was detected when the then CEO of the company suspected accounting and audit issues, and ordered a review of the accounting records (Thibodeau and Freier 2006). At the center of the fraud was an augmentation of the company's length time of fixed assets, leading to a reduced depreciation and exaggerated income. In sum, the company reported inflated earning at about $1.7 billion. In connection with fixed assets, the company's property, plant and equipment accounts were unreasonable overstated.

In turn, understated depreciation resulted in higher after-tax earnings for the year. In addition, the company also reported higher environmental reserves in its liabilities, particularly basing them on acquisitions. Added to these errors was the improper capitalization of a variety of expense accounts (Madura 2004). The company did not also record value decreases in valuation of its landfills primarily used for waste management. This report provides an in depth analysis of the case, providing reasons for the fraud, and the implications for investors, creditors, auditors and employees. Furhtermore, the report also provides some of the auditing and accounting implications of the case. The case is reported as one of the blackest financial frauds. A few recommendations on accounting fraud prevention also forms part of this report.

The Factors that led to the Fraud

For the first, there was no apparent conflict of interest between the company's top management and the auditors. This could be the prime reason for the fraud. An auditor is a watchdog for management. However, if fraudulent interests of management and auditor co-exist chances are greater. For instance, in 1995, the auditors could not see the 'materiality' in the $160 million misstatement (Thibodeau and Freier 2006). Similarly, there were several instances where the auditors kept themselves blind during the audit. If any misstatement was discovered, it was ignored.

The Specific Fraud: Understatement in Depreciation

The selection of an unreasonably long amortization period results in a build-up or amortizable assets on the balance sheet (Madura 2004). As such, future charges may be needed to write down those assets if they become value-impaired. Waste Management Inc. is a case in point. While not considered scandal, in 1997, the company took an impairment loss and restated its financial statements for 1994, 1995 and 1996 (Jones 2011). The culprits used unrealistically long amortization periods and residual values that were set too high. There were high statements of net income because of lower, inaccurate depreciation of the company's property, plant and equipment totaling about $6 billion.

Effects on investors, creditors, company employees, the individuals that perpetrated the fraud, and the investment and regulatory markets

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