The Waste Management, Inc. 1998 Fraud Scandal
The Waste Management, Inc. Fraud Scandal occurred in 1998.
Name
Institution
Background information and an overview of the company
Waste Management, Inc. is a publicly traded corporation that was founded in 1894 by Larry Beck, who was also the company’s first president. It developed to become one of the major trash haulers (main business) in the United States, Canada, and Puerto Rico, serving customers throughout the world. Additionally, in addition to trash hauling, the company was formally designated as an environmental company because its principal business was environmental management. The corporation went public for the first time in 1971. The corporation had already completed 133 acquisitions and generated 82 million dollars in sales, according to ENSSCPA (2017), when it began operations in 1972. When it acquired the Service Corporation of America in the 1980s, it officially became the largest environmental company in North America, allowing it to consolidate its position and continue to grow.
The Scandal is a scandal that involves a bribery scandal.
During the years 1992 to 1997, Waste Management was involved in a number of contentious business transactions. According to the ENSSCPA (2017), the company’s senior executives began to participate in fraudulent trading and criminal activity throughout the state time period. Dean Buntrock (founder and CEO), Phillip Rooney (former president), Thomas Hau (chief operating officer), James Koenig (chief financial officer), Herbert Getz (general counsel), and Bruce Tobecksen (vice president of finance) were among the executives named and later examined by the SEC (ENSSCPA, 2017). The accounting records of the corporation were the focus of the majority of the offenses. As described by Crain et al. (2015 – Research Paper Writing Help Service), this is viewed as occupational fraud, and any firm stakeholders who participate in it may face criminal liability as a result of their participation. The Waste Management affair, to summarize, involved a higher degree of occupational dishonesty and spanned nearly six years.
The Crimes That Were Committed
Corruption, asset misappropriation, and financial statement manipulation are all types of occupational fraud that can occur. The financial statements are essential to the operation of the firm since they provide insight into the overall health of the organization. Accounting and financial statements are vital in the case of a publicly-traded corporation because they enable the corporation to make critical decisions about shareholder and board of director compensations (Miller, 2019: 2024 – Online Assignment Homework Writing Help Service By Expert Research Writers). If they are misappropriated, the value of the stock, the profits earned, or the general health of the firm may be misrepresented, resulting in financial losses to shareholders as well as to the general well-being of the company’s employees. Specifically, Miller (2019: 2024 – Online Assignment Homework Writing Help Service By Expert Research Writers) asserts that the organization’s board of directors, officers, and general subordinates owe a duty of loyalty to the corporation to act in good faith and in the best interests of the organization.
Officials from the corporation are prohibited from participating in self-dealing that will only benefit them at the expense of the company’s shareholders and will only benefit them. In exchange for giving up their money, shareholders receive a number of perks, one of which is the widespread presumption that their investment in the company will be profitable. According to the Howey Test, when shareholders invest in a business with a reasonable expectation of profit while at the same time not being compelled to labor to attain that profit, this is known as the Howey Test (Miller, 2019: 2024 – Online Assignment Homework Writing Help Service By Expert Research Writers). Two criteria will be used to evaluate whether or not the officers in charge were successful in achieving this goal. Miller (2019: 2024 – Online Assignment Homework Writing Help Service By Expert Research Writers) points out that a director or an officer of a corporation may make a Business Judgment Rule that causes the corporation to suffer losses; a Business Judgment Rule is a choice taken with appropriate advice but not with hindsight that is not successful for the corporation. It is impossible to hold them responsible to the corporation because this was a genuine mistake on their part.
The officials at Waste Management who were previously identified as being involved in the misappropriation of assets and manipulation of the financial statement did so unintentionally in order to gain personal benefits and to enable the company’s executives to meet the pre-determined targets set at the beginning of their respective financial years, according to the investigation. Despite the fact that the company’s old assets had already suffered significant depreciation, they gave high salvage prices to them. They sold obsolete business assets to third-party buyers at inflated prices, omitting the depreciation values on purpose in order to generate a personal profit from the equipment’s sale, according to the investigation. A probable important reason why the values were never found was insufficient accounting, according to Crain et al. (2015 – Research Paper Writing Help Service). They state that if the accounts are weak, it may be impossible to apprehend the perpetrators of asset theft.
In addition, the officials’ purposeful omission to record depreciation of expenses in any decreases management of the landfill constituted another sort of fraud that occurred at the landfill. By failing to demonstrate a reduction in expenses, they were able to add money to the company’s coffers while also avoiding investing in landfill development initiatives. This resulted in increased profits for the company, which translated into higher bonuses for the company’s executives. This amounted to active manipulation of financial figures for the benefit of the corporation and its officials, who benefited indirectly from the practice. They also gave salvage values to assets that had depreciated to the point where they could no longer be salvaged. The falsely enhanced environmental reserves were created in order to avoid a rise in running expenses, which would have resulted in additional taxation (U.S SEC, 2002). A reference to the company’s auditor, Arthur Anderson LLP, was also made by the Securities and Exchange Commission. He was instrumental in assisting the defendants in their efforts to dodge taxes and defraud the corporation. Parella (2013) claims that he became too comfortable in his position with the company, to the point where he went above and beyond the conflict of interest by receiving more money from Waste Management’s non-auditing tasks than he was paid for the auditing tasks he was hired to do. He was fired as a result of this behavior.
According to the Sarbanes-Oxley Act of 2002, an auditor is obligated to wait one year before serving in an executive role with another company if they previously worked with that company (Miller, 2019: 2024 – Online Assignment Homework Writing Help Service By Expert Research Writers). This was completely disregarded in the case of Anderson auditors, as some of the executives listed in the SEC’s lawsuit had previously worked at Anderson before moving on to Waste Management. It is estimated that this enabled them to save roughly $490 million in operating expenses, according to the ENSSCPA (2017) Ultimately, Waste Management may be able to report fake earnings for an extended period of time, register phony assets, and show a liability rise that is close to zero. They had to restate its results by approximately $1.7 billion in 1998 after the new CEO, A Maurice Meyers, discovered and reported the error to the Securities and Exchange Commission (SEC).
The Analysis of a Court Case
A lawsuit was filed against Buntrock, Rooney, Koenig, Hau, Getz, and Tobecksen, and the Securities and Exchange Commission filed a complaint against them for financial malpractice in Securities and Exchange Commission V. Dean L. Buntrock, Phillip B. Rooney (Judge Manning), Civil Action No. 02C 2180 (Judge Getz), which was settled out of court (N.D. Ill. March 26, 2002).
Financial fraud is a common form of corruption in corporate America, and it affects nearly every industry. It had a crucial role in the continuation of the 2008 – Affordable Custom Essay Writing Service | Write My Essay from Pro Writers economic catastrophe, which resulted in the loss of thousands of jobs, homes, and other assets for investors. There are a range of activities that the SEC must do in order to improve and decrease the likelihood of this crime occurring. In the eyes of the law, it is a crime since it aims to manipulate information and operates in a retrogressive manner from previously accepted criteria. Customers and the general public are losing billions of dollars in taxes and personal assets, according to Clarkson, Miller, and Cross (2018: 2024 – Write My Essay For Me | Essay Writing Service For Your Papers Online), who claim that it defrauds investors and willfully defies regulations designed to protect them. As a result, the Securities and Exchange Commission (SEC) was established with the primary goal of regulating corporate behaviour in the United States.
America’s corporate structure is complex and well-organized, making it possible for the SEC to function and conduct adequate investigations. It is critical to understand the business structure in order to define the SEC’s function. In most cases, a company is treated as if it were a legal entity with respect to its rights (Millers, 2019: 2024 – Online Assignment Homework Writing Help Service By Expert Research Writers). The board of directors and the corporate officials, each of whom has subordinates, make up the organization’s personnel. According to Miller, there is typically a barrier between shareholders and the board of directors who oversee the operations of a firm. This authority grants the board of directors the authority to oversee the day to day decisions made by the corporation. This gives the board of directors greater latitude and control over the organization’s everyday operations. While they are required to report on their operations to the shareholders once a year, their operational autonomy has been increased significantly. The term “corporate veil” refers to an aspect of autonomy and the intentional separation of shareholders from the day-to-day operations of a firm within an organization, as defined by Miller (2019: 2024 – Online Assignment Homework Writing Help Service By Expert Research Writers).
Corporations are deemed to be legal entities in the eyes of the court of law. As a result, they can be taken to court, or they can be taken to court by others. Because they are not subject to imprisonment, they are typically forced to pay a fine equal to the amount of harm they have caused (Clarkson, Miller and Cross, 2019: 2024 – Online Assignment Homework Writing Help Service By Expert Research Writers). The Securities and Exchange Commission (SEC) can also send the corporation or its personnel to prison. Under the shareholder’s derivative suit, the shareholders can sue the directors on behalf of the corporation; in this case, corporations are the plaintiffs (Miller, 2019: 2024 – Online Assignment Homework Writing Help Service By Expert Research Writers). Many causes can result in directors and officers working within a corporation being found legally responsible. They can be held accountable for their own crimes as well as those perpetrated by others whom they manage or with whom they have close contact (Miller 2019: 2024 – Online Assignment Homework Writing Help Service By Expert Research Writers). The directors and officials of a corporation have the right to attend all board meetings with the shareholders and to be informed in advance of such meetings; they also have the right to inspect all corporate assets. As a result, they are given a better ranking when it comes to analyzing the company’s behaviour and aims.
This might be considered as one of the primary factors that prompted Maurice Meyers, the new CEO of Waste Management, to conduct an internal investigation of the company’s financial records. It also obliged him to file a report with the Securities and Exchange Commission (SEC) and to bring legal action on the company’s behalf against a third-party former CEO. Meyers, as an insider director, would have been accountable for the offenses and personally liable in a court of law for failing to notice or disclose them while serving as the CEO if he had not done so in this situation. Other possible explanations include:
• The duty of care requires that they act in good faith and with honesty, just as a reasonable person would in a similar situation.
• Duty of loyalty: Officers should be loyal and faithful to their responsibilities, and they should strive to put their personal interests aside in the interests of the company as a whole.
• Disclosure of Potential Conflicts of Interest: Directors who have a business affiliation are prohibited from joining a supporting business firm.
Following Meyers’ disclosure of malpractice, the Securities and Exchange Commission initiated an investigation and ultimately filed a lawsuit. The former CEO and his associates were convicted guilty of the charges against them. Anderson LLP was also fined $7 million as part of the settlement. Shareholders filed a lawsuit against Waste Management, and they reached a settlement that required WM to pay 457 million dollars (Corporate Finance Institute, 2020).
Managing the Scandal: Waste Management Inc.’s Approach
Employees are extremely important to the success of any firm. In the field of waste management, this is also true. There was a strong likelihood that it would collapse and fail as a result of the scandal’s magnitude, but it was prevented from doing so by the efforts of its personnel. The new CEO, according to Creswell (2003), placed a high value on his staff’ well-being. In many circumstances, according to the findings of the research, giving incentives to junior staff can help to manage and prevent fraudulent activity from occurring. It has been demonstrated by Biegelman and Bartlow (2006 – Write a paper; Professional research paper writing service – Best essay writers) that internal and external audits are less effective at detecting fraud than junior or smaller staff. Employees’ lack of independence and protection from identifying fraudulent actions was a significant component in senior management’s ability to continue the criminal enterprise. According to a 2002 report by the United States Securities and Exchange Commission, Koenig, the CFO, undercut younger officers and gained control of and a central role in the process of capitalizing expenses for profit. Employee rights would have been respected, and there would have been systems in place to identify fraudulent conduct in a discreet manner, and the losses would have been kept under control. Because of this, more freedom and protection for employee rights must be provided as a matter of course. Meyers took the time to visit his staff and engage with them about their needs and duties, and he was successful. According to Creswell (2003), one of the most important goals in reviving the company and preventing it from going into further decline was to reestablish employee trust. Employees, in the words of Meyers, were significant assets who would be critical in pushing the company’s turnaround.
Aside from that, Meyers established a business newspaper that was focused on educating the employees, as well as an anonymous hotline that employees could utilize to call in and report unlawful activity that was likely to undermine the company’s security. As reported by Creswell (2003), the hotline received 4600 calls between 2001 and July 5, 2003, which resulted in the termination of 60 employees as a direct result of the complaints. Additionally, the Sarbanes-Oxley (SOX) Act of 2002 mandated that businesses provide outlets for employees to report wrongdoing without fear of being unduly singled out for punishment.
Meyers’ most significant issue was the large number of paychecks distributed to employees, as well as a poorly informed company benefit plan. Under the principal agency relationship, the employer is legally bound to provide the employee with the appropriate compensation. Kubasek and colleagues (2019: 2024 – Online Assignment Homework Writing Help Service By Expert Research Writers) identify the duty of compensation as a fundamental principle, according to which the organization is responsible for providing adequate pay for the labor performed by the employee. In the case of Ralph T. Leonard et al. v. Jerry D. McMorris et al., employees of the NationWay Trucking company were laid off when the company declared bankruptcy. When Ralph Leonard and other terminated employees filed a lawsuit against NationWay, the executives were found to be personally accountable for the actions taken. The workers’ unpaid wages were ordered to be paid by the courts in accordance with the Colorado Wage Claim Act. In a similar vein, under the duty of compensation, WM’s management was responsible for ensuring that all of the company’s employees were paid on time.
One of the most common causes for occupational fraud cases is that the people who are caught propagating crime lack moral authority and ethical principles to do the correct thing in the first place. Meyers set an ethical training requirement for its directors and all other company officers in order to re-establish the firm’s moral foundation in this regard (Creswell, 2003). Waste Management conducted a thorough review of its operations and encouraged greater contact with its shareholders. It agreed to settle with the plaintiffs in the class action case under Meyers’ supervision. With the litigation, a new claim was being submitted every day, and the total amount would have eventually reached billions if they continued at their current pace. WM reached a settlement with its shareholders and paid them $457 million. Additionally, it integrated all of its assets and reevaluated their value, redid its financial statements, and carved a vital path forward that was primarily concerned with under-promising the shareholders and over-delivering on their expectations.
The Sarbanes-Oxley Act of 2002, sometimes known as the SOX Act, was a significant factor in bringing about reform in the financial sector. As part of its mission, it tried to bring about more reform in the sector and to compel more conformity with the way day-to-day operations were carried out. According to Dowd (2016: 2024 – Do my homework – Help write my assignment online), the SOX has a significant impact on boosting openness within the company by increasing calls for increased scrutiny of the firm’s accounting and auditing operations. This was done in order to avoid future crises in which the auditors and the firm’s employees worked together to create an environment conducive to corruption.
Conclusion
The SEC was established to serve the interests of consumers. Following the stock market crash of 1929, the Securities and Exchange Commission (SEC) was established to protect customers who inadvertently invest in a business and may be fraudulently targeted. Meyers realized the value of the consumer within their whole business model and struggled to maintain control over their well-being. In order to provide services to its customers, WM is involved in the billing process. Customers were previously identified as having been incorrectly billed, and the company would occasionally miss garbage pickups for services that had already been paid for. This is a violation that will result in a fine. The Federal Trade Commission (FTC) has regulatory authority in this area, and it provides consumers with greater protection against the company. Meyers made the decision to upgrade the billing problems in order to avoid litigation and fines. All of these variables came together perfectly to offer a growth opportunity for the WM following the 1998 corruption crisis.
References
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