Ethical Corporate Culture In Waste Management Incorporation Company: Opinion Essay

Abstract

The purpose of this paper is to analyze the ethical issues which focuses on the company of the Waste Management Incorporation. In this paper, we will look deeper into the scandal or the accounting fraud that has occurred in the company by its executives by the officers, and we will learn more on the effects of these frauds to the company, to the executives involved as well as the impact to the shareholder of Waste Management Incorporation. Most importantly, this report will include an analysis on the unethical problems that had made the scandal possible.

Introduction

In a business world, it is very crucial for an entity or an organization to have an ethical code of conduct within the company itself. Ethics is a system of moral principles that could influence the way people are making decisions in their lives. Ethics does not only focuses on decisions for the individual himself but also to the entire society. A company have a responsibility to put a greater emphasize on the ethical corporate culture in order for the business to be properly managed and for it to avoid any unethical conduct that could deteriorate the organization’s performance.

Unfortunately, there have been numerous accounting scandals that had occurred in the past decade. The motives behind the wrongdoings of accounting manipulation are countless. Whether to fulfill own desire or for the benefit of the company, these are still very unacceptable as it would bring about the damaging consequences to the whole organizations and to every individual associated with the company.

Many big organizations who were once a successful company which worth thousands of billions of dollars had experience getting into such situations. Some of them had miraculously recovered from the fault actions of accounting frauds, but some has been pronounced into a state of bankruptcy. How shameful it is to face such drawbacks after all the hard work of keeping the company on top of the chart.

One of the example of a profitable company that manage to keep in business despite having to face a large accounting manipulation is the Waste Management Incorporation Company.

Waste Management Inc. backgrounds.

Waste Management Inc. is a waste company which was found in 1894 in North America by Larry Beck and the headquarter is based in Houston, Texas. The Company offered environmental services the collecting, transferring, disposing of, and recycling waste, as well as providing resource recovery and hazardous waste services to almost 20 million customers in America, Canada, and Puerto Rico.

The Waste Management Inc. operate about 249 landfill sites, the largest network of landfill in North America. Their goals are to serve the customers, the employees, the environment, the communities in which they work and to their stockholders. The company is believed to meet the challenges of the changing waste industry and their customer’s waste management needs, and they will work together to envision and creating more sustainable future.

Ethical Violation

Ethical violation of financial reporting may compromises different methods for cooking the accounting books. These include overstatement of revenue, understatement of expenses, understatement of assets, improper use of reserves, misapplication of accounting rules and misrepresentation of information.

Waste Management Inc. had shown a very good performance in their business by earning about 82 million dollars in revenue and had 133 acquisitions after the company went public in 1971 and by 1972. Although the company is leading in the industry, it had experienced quite threatening situations when there were accounting malpractices found happening in the company.

When a new CEO of the company reviewed the company books and accounting policies, it was obvious that there is accounting fraud being committed. This then led to the US Securities and Exchange Committees (SEC) investigations towards the company where the company were ordered to restate their financial statements. After the restatement, it was exposed that the founder and some of the executives had overstated the company’s pre-tax income by about 1.7 billion dollars.

It is on March 26, 2002 that the founder of Waste Management Inc. together with five other officers in the company were sued by the SEC. The executives was dragged to the court for the involvement in financial fraud for over five years, by falsifying and manipulating the company’s financial results between the years 1992 and 1997.

Five of the executives involved were Dean Buntrock (Founder and CEO), Philip Rooney (Former President), Thomas Hau (CAO), James Koenig (CFO), Herbet Getz (General Counsel), and Bruce Tobecksen (Vice President of Finance). Not only that, an auditing company was also included in the case as it was reported that the auditors had assisted the officers in the fraud by issuing the unqualified audit opinions from time to time. Since Waste Management Inc. was a publicly traded company, they need an auditor for their accounting books, Arthur Andersen were hired to adjust and fix any errors in the company’s accounting books. It was clear that an error was found in the Waste Management Inc.’s accounting book, and instead of making an adjustment to the errors, Andersen was bribed with additional fees through “Special work” by the Waste Management Inc.’s stakeholders to not making any changes to the books.

Furthermore, some of the complains charges against Waste Management Inc. includes avoiding depreciation expenses on their garbage trucks, assigning arbitrary salvage values to assets, failure to record expenses for decrease in the value of landfills as they were filled with waste and the failure to establish sufficient reserves to pay for income taxes and other expenses and etc.

Effects of Frauds

Accounting frauds is a major loss for a company. Not only it damages the executives involved in the scandal, but it may affect the company and to other innocent individuals which appears to be at the time the frauds had taken place.

In the case of Waste Management Inc.’s accounting manipulations, the six officers involved, Dean Buntrock, Philip Rooney, Thomas Hau, James Koenig, Herbet Getz and Bruce Tobecksen were charged with committing massive fraud, lasting over five years. Buntrock, Rooney, Getz and Hau were barred permanently from acting as a director or officer of any publicly traded company and were asked to pay about $30 million of disgorgement, prejudgment interest and civil penalties. And for Keonig, he had to pay over $4 million and Tobecksen was required to pay about $800,000.

In addition, the company’s auditor Arthur Andersen was also charged with a suit by the Securities and Exchange Commission. His accounting firm was fined over $7 million for fraudulent financial reporting of Waste Management Inc. And at the same time, Andersen need to pay some $220 million to Waste Management shareholders.

Moreover, due to the thoughtless acts of the executives and the officers, Waste Management Inc.’s investors had lost $6 billion when the company’s stock crashed from the restated earnings. After the case was settled, Waste Management Inc. shareholders lost about $20.5 billion and all the chaotic situations had caused around 11,000 employees to leave off the company.

Ethical Issues analysis

What is more important than the effects of the accounting frauds is that the driving force behind the unethical conducts, what makes and encourages the executives and the individuals themselves into pursuing in manipulating the Waste Management’s accounting books.

After looking deeply into the mistreatment of Waste Management’s financial statement, these unethical acts may happened due to the factors in terms of the opportunity, rationalization and motives behind the behavior. These three are part of the fraud triangle that are presented in different forms of characteristics (Figure 1) of a firm that is caught in fraudulent financial reporting, in this case the Waste Management Inc.

The opportunity is a condition that provides a chance for the management to influence the accounting information. In this manner, since all of the executives involved are all high up in the hierarchy of the organization and they have the most power in the company, these gives them the opportunity to easily making changes to the company’s financial statements. The negative outcomes of low target earnings of Waste Management Inc. would jeopardize the status of the officers in the company. Due to this, it pushes the officers to engage into committing the frauds in order to protect their corporate positions and status in the business and social communities.

Furthermore, rationalization was the driving force behind the executives conducts. According to this factor, an individual will act according to what is believed to be true and are accepted by themselves and they will try anything to stay ahead of its competitors, even if it is against the company’s rules.

It has been clearly proven that one of the reasons that the scandal are forced to occur was because of the executives attempts in meeting the desired predetermined earning targets by expanding and pushing down or foregoing expenses. They may claim that they did it for the sake of protecting their shareholders. The Company’s performance obviously showed that their revenues were not increasing as what has been expected by the team. So in order to make things right and to show that the company are actually doing very well, fraudulent activities was committed for their financial statements to state the desired outcome.

Another factor is the motives behind the unethical doings of the frauds. The motives of each of the individuals involves may varies between each other in terms of a poor cash position, afraid of losing the customers and the declining market of the company.

The founder and the CEO, Dean Buntrock has executed most of the frauds by himself as he was the founder of the company, giving him a greater access to any information and towards all of the accounting books directly. He along with the stakeholders was full of greed and they put operating the company in honest and efficient manners in the very bottom of the way.

By controlling the information in the financial statements, they are dodging the bullets of losing the power on making any important decisions regarding the performance of the company if there is any losses occurs and at the same time they are able to retain their sits on top of the hierarchy.

And to be added, the CEO and the rest of the executives may try whatever they have in power to keep their lavish and convenient lifestyles as long as they can put the company in the safe positions in the market. They will continue to attract outside parties such as the investors with the positive numbers in the financial statements after it was manipulated.

Moreover, in the case of Waste Management’s accounting scandal, one of the main players of the accounting books manipulation was its auditor, Arthur Andersen. Arthur Andersen has damaged the reputation of the American accounting firm by helping its client in managing the books in illegal ways. In point of fact, Andersen has a very close relationship with the stakeholders of Waste Management Company as the CFO, James Koeing and the CAO, Thomas Hau were previously trained at Arthur Andersen as an auditor and was the partner of the auditing company for 30 years.

According to the SEC regulators, they are too comfortable with each other in regards to their long relationships. And since they have such a connections, this may be created pressure to the auditors and conflicts within themselves in the auditing process of Waste Management Inc. When the stakeholders asked Andersen to manipulate the books, the auditors have no choice but to follow what was being ask by them, this is due to Andersen trying to protect and maintain their relationship with the executives. And at the same time, the stakeholders were able to escape the frauds with the help of their associates.

Researcher’s Point of View

In addition, the scandal could happen due to the unethical leadership of the CEO Dean Buntrock. Since the CEO himself are involved in the scandal, this makes the rest of the executive to be bravely involved and joined in into the book’s manipulation. This would not happen if the CEO had guided the officers properly and had shown them the proper ethical corporate culture in the organization. As a leader, Buntrock failed to direct the company into a standard and excellent company that are free from any illegal activities which in the end worsen the company reputation.

Besides that, the reasons that the changes in the financial statement happened was perhaps due to the unrealistic and conflicting goals of Waste Management Inc. The company may set their targets too high and when they did not get the results as what they expected, they are determined to show their desired outcomes in the statements by breaching the ethical and legal guidelines of preparing accounting informations.

As for the accounting firm, instead of being a whistleblower of the Waste Management Inc, or reporting the company’ s illegal accounting violations to the Financial Accounting Standards Board, Arthur Andersen played along with the executives. The reason is obviously because he wanted to maintain his good relationship with the executives, and he probably felt burden knowing the fact that the Waste Management company was their client for a long time. So in order to not disappoint the executive, Andersen agreed to engage in the immoral actions.

Recommendation

As a researcher on this case, there are several recommendation that I would like to propose. For any company that have gone through the case of accounting frauds, especially those whose CEO was involved, I would suggest to hire a new CEO. A new CEO would have benefited the company greatly with a new leadership and fresh way of thinking. It would bring the company towards an outstanding performance and with an excellent guidances that will become the good example towards other executives.

Another recommendation I would have would be to change and to appoint a different auditor that did not have close and comfortable relationship to the officers in the company. A good auditor would help the company along the way if there is any mistakes found in the financial statement and not to hide their fault, which in the end makes the situations to get worse.

To be added, to avoid the frauds to happen, high expectations and high target of the company’s profit should be eliminated or it should be lowered down. Often, due to the pressure of not getting to keep up with the goals, it creates the incentives to the executives to carry out the deception of the accounting information.

Conclusion

In conclusion, it is very important for one company to emphasize their ethical corporate culture in the organization. A proper ethical guideline would help every individual in the firm to realise their full potential of executing a good and moral conduct in managing the company. Ethical influence does not only come within a person himself but it also depends from the surrounding situations. The Waste Management Inc. accounting frauds act as an example to other company that any unethical activities would harm and affect the people involved and the company itself negatively. Every organization must take very careful precautions to avoid any unwanted event to occur.