Waste Management: At the Top of the Heap?
Case prepared by
Dr. Sarah Stanwick, Auburn University, School of Accountancy
Dr. Peter Stanwick, Auburn University, Department of Management
No part of this case may be reproduced without the consent of the authors.
The authors gratefully acknowledge the receipt of a 2002-2003 Daniel F. Breeden
Endowment for Faculty Enhancement Grant.
Operating in the United States, Canada and Puerto Rico, Waste Management serves more
than 25 million residential and more than 2 million commercial customers. The company
provides waste collection, transfer, recycling, resource recovery and disposal services to
its clients. Table 1 describes the sites owned by Waste Management (Hoover’s, 2003).
TABLE ONE
WASTE MANAGEMENT SITES
(SOURCE: HOOVER’S COMPANY CAPSULES, 2003)
Waste Management owns/operates a network of approximately 1,200 sites:
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290 landfills
5 landfills are hazardous waste landfills
350 transfer stations
145 recycling centers.
Waste Management develops and operates waste-to-energy sites in the United States.
By the end of 1997, Waste Management had employed its fourth CEO of the year. At
year end, corporate turnaround specialist and newly elected interim chief executive
officer, Steve Miller, was discussing the possibility of Al Dunlap, of Sunbeam fame,
becoming the next CEO of Waste Management. However, Dunlap dismissed such a
claim. He stated, “As a courtesy to several large shareholders of Waste Management,
some of whom are investors in Sunbeam, I agreed to meet several weeks ago with Steve
Miller at my home in Florida to give him some ideas on how to improve Waste
Management. Mr. Miller flew in to see me at their insistence, and it was obvious that he
really had no desire to listen to anything I had to say. I clearly am the CEO that Waste
Management needs; however, with their current board culture and the attitude of Mr.
Miller and others like him, I wouldn’t consider heading that company.” Mr. Miller
responded by saying, “I did say I thought Al was campaigning for the job.” Mr. Miller
later retracted his statement (Bailey and Jaffe, 1997). In addition to finding a new
permanent CEO, Miller had to respond to questions about the company’s accounting
practices and an inquiry from the SEC. Miller would not dispute the comment from some
investors that an accounting charge of $1 billion might be possible for 1997-year end
(Menn and O’Brien, 1997).
In February 1998, the company took a $3.54 billion in pretax charges and writedowns.
This was the company’s attempt to undo years of aggressive accounting charges and
overstatements of assets. In March 1998, Waste Management announced that it was
being investigated by the Securities and Exchange Commission (SEC) for dubious
accounting practices and internal controls. At the same time, Waste Management said
they had not received a formal notice from the SEC, but they had learned that the SEC
had opened an inquiry into the restatement of their earnings. A company spokesman,
William Plunkett, stated that “Given our recent announcements related to our restatement
of previous earnings, that there is an inquiry should come as little surprise to anyone
(Gaines, 1998).” On June 20, 2001, the now disolved Arthur Andersen accounting firm
settled with the Securities and Exchange Commission in what is the largest ever civil
penalty of $7 million against a public accounting firm. The charges resulted from the
audits of Waste Management from 1992 to 1996. Andersen issued unqualified opinions
on the company’s financial statements. These statements overstated the company’s
pretax income by more than a billion dollars. Waste Management agreed to restate the
five years of financial statements which reduced their pretax earnings by $1.43 billion
(Taub, 2001). Andersen neither admitted nor denied the allegations or the findings (SEC,
2001).
In addition to the charges against Waste Management from an accounting standpoint,
Waste Management also has several charges against it from an environmental
perspective. From 1970-1991, as identified by the Environmental Background
Information Center, the company had accumulated 10 criminal violations, 23 antitrust
civil cases, 22 environmental civil cases, and 87 administrative cases. Table 2
summarizes several of the more recent sanctions against Waste Management, as
identified by the Environmental Background Information Center.
TABLE 2
RECENT SANCTIONS AGAINST WASTE MANAGEMENT (1991-1999)
(SOURCE: HTTP://WWW.EBIC.ORG/PUBS/WMX.HTML)
December 1991: $3.3 million for violations at Sauget, Ill. Facility
October 1992: plead guilty and paid $11.6 million for 6 violations of environmental laws
at a Superfund site
October 1994: $587,900 penalty awarded by a jury to a former whistle blower who
worked at company toxic waste incinerator
November 1994: $60,000 settlement of a class action lawsuit which charged improper
cleanup and monitoring of groundwater contamination
December 1996: $100 million in fines for fraudulent activities
March 1997: employee arrested on wire tapping charges
October 1997: $100,000 fines and penalties against the company by OSHA when 3
workers died in tree separate accidents at the Brooklyn, NY facility
November 1998: $125,000 fine for improperly disposing of medical waste in the state of
Virginia
December 1998: settled class action lawsuit for $220 million for falsely inflating their
stock prices and overstating earnings
December 1998: $186,700 combined penalties with four companies in Florida for
violations at a recycling plant
January 1999: $7.5 million settlement for illegally removing a landfill from property tax
rolls
January 1999: attempt to take over a hauling operation is rejected in California
By November 2002, the company was looking at ways to control costs without cutting
more jobs. Measures like controlling travel, entertainment, consulting and office charges
were being discussed. By 2002, the company had eliminated 2,000 positions (Johnson,
2002).
Questions for Consideration:
1. Is this a lesson in corporate governance? Why or why not?
2. Update the case. What lawsuits were settled in 2001? How were they settled?
3. What was the role of Arthur Andersen in this case? Why do you suppose that Arthur
Andersen was involved in so many ‘ethical’ cases during their tenure?
Resources to Consult:
1. December 24, 1997. Dunlap’s Tongue Cuts as Deep as his Downsizing Ability. Jeff
Bailey and Greg Jaffe. Pittsburgh Post-Gazette, D-7.
2. December 24, 1997. Waste Management Problems Would Tax Even Dunlap’s Skills.
Joseph Menn and Stephanie O’Brien. Pittsburgh Post-Gazette, D-7.
3. March 30, 1998. SEC Probing Waste Management’s Accounting. Sally Gaines.
Chicago Tribune. www.chicago.tribune.com.
4. November 26, 2000. Corporate Profile: Waste Management Incorporated.
Environmental Background Information Center. www.ebic.org.
5. June 19, 2001. Arthur Andersen LLP Agrees to Settlement Resulting in First
Antifraud Injunction in More than 20 Years and Largest-Ever Civil Penalty – of $7
Million – in SEC Enforcement Action Against a Big Five Accounting Firm. SEC.
www.sec.gov.
6. July 19, 2001. Breaking News: Andersen Settles with SEC – First anti-fraud
injunction in more than 20 years and largest-ever civil penalty. Stephen Taub.
www.CFO.com.
7. November 25, 2002. 2003 Could Include More Layoffs at WMI. Jim Johnson. Waste
News, page 1.
8. 2003. Waste Management Inc. Hoover’s Company Capsules. Hoover’s Inc.