Balance Sheet Bunko

Former Senior Executives of Waste Management Inc. falsified and misrepresented the company's financial results during a five-year period beginning in 1992, according to a complaint by the Securities and Exchange Commission (SEC) filed in U.S. District Court in Chicago.

The 138-page complaint charges the defendants with violating, or aiding and abetting violations of, the federal securities laws by deliberately manipulating financial statements to make reported results appear better than they actually were.

In particular, when the company's revenues and profits weren't meeting predetermined earnings targets, the defendants allegedly resorted to “top-level adjustments” — improperly eliminating and deferring current period expenses to inflate earnings and secretly revising performance reports from subsidiaries.

Using questionable accounting practices and helped by the company's long-time auditor, Arthur Andersen LLP, the defendants allegedly avoided depreciation expenses on their garbage trucks by assigning inflated salvage values and extending their useful lives; failed to record expenses for decreases in the value of landfills as they were filled; refused to record expenses for writing off the costs of abandoned landfill development projects; established inflated environmental reserves in connection with acquisitions, using the excess reserves to avoid unrelated operating expenses; and improperly capitalized a variety of expenses.

The company was able to hide some $1.7 billion in expenses from 1992 through 1997, according to the complaint. Houston-based USA Waste Services Inc. bought Waste Management and began using its name in 1998. The company, which is still headquartered in Houston, dumped Andersen before the SEC filed its lawsuit.

Less than a year ago, Andersen settled a major civil fraud case with the SEC by paying a $7 million fine and signing a consent order under which the firm agreed to act responsibly. Notably, the case stemmed from the firm's audits of Waste Management. Indeed, federal prosecutors charged Andersen with felony obstruction of justice for destroying Enron documents because they saw the firm as an unrepentant repeat offender.

Andersen is not a defendant in the SEC suit. “We settled with the SEC last June, and we have nothing to add to that,” an Andersen spokesman told The New York Times.

In fact, Andersen targeted many of the company's improper accounting practices, and even presented management with proposed corrections for previously understated expenses and overstated earnings. Still, after company management refused to correct the misstatements, Andersen issued repeatedly unqualified audit reports. Moreover, the complaint charges that senior management, while limiting Andersen's audit fees, nevertheless awarded the firm a $3.7 million consulting contract for a “strategic review” of the company's business. A former board member described the abandoned project as a “boondoggle,” the complaint states.

The named defendants have denied any wrongdoing, insisting that all accounting practices were approved.

The columnist is a Washington, D.C., attorney and serves as general counsel of the Solid Waste Association of North America.

[Securities and Exchange Commission v. Dean L. Buntrock, et al., No. 02C-2180, N.D. Ill., March 26, 2002.]

The legal editor welcomes comments from readers. Contact Barry Shanoff via e-mail: [email protected].