The Securities and Exchange Commission has filed suit [1] against the founder and five other former top officers of Waste Management Inc. for massive fraud. The complaint charges the defendants with inflating profits to meet earnings targets.

The officers named in the complaint include the following:

• The CEO, who set earnings targets, fostered a culture of fraudulent accounting, personally directed certain of the accounting changes to make the targeted earnings, and was the spokesperson who announced the company's phony numbers.
  
• The CFO, who ordered the destruction of damaging evidence, misled the company's audit committee and internal accountants, and withheld information from the outside auditors.
  
• The corporate controller, who devised many "one-off" accounting manipulations to deliver the targeted earnings and carefully crafted the deceptive disclosures.
  
• The general counsel, who blessed the company's fraudulent disclosures.

In brief, the complaint says the company's revenues were not growing fast enough to meet its earnings targets, so the defendants instead resorted to improperly eliminating and deferring current period expenses. Specific tactics:

• Avoiding depreciation expenses on their garbage trucks by both assigning unsupported and inflated salvage values and extending their useful lives.
  
• Assigning arbitrary salvage values to other assets that previously had no salvage value.
  
• Failing to record expenses for decreases in the value of landfills as they were filled with waste.
  
• Refusing to record expenses necessary to write off the costs of unsuccessful and abandoned landfill development projects.
  
• Establishing inflated environmental reserves (liabilities) in connection with acquisitions so that the excess reserves could be used to avoid recording unrelated operating expenses.
  
• Improperly capitalizing a variety of expenses, and failing to establish sufficient reserves (liabilities) to pay for income taxes and other expenses.

The SEC says Andersen, the company’s auditor, identified the improper accounting practices, quantified much of the impact, and annually presented company management with a set of "Proposed Adjusting Journal Entries." Instead of making the adjustments, management signed off on a "Summary of Action Steps" that the SEC says included steps designed to write off the accumulated errors and to change the underlying accounting practices in future periods.

Illinois Targets Four Andersen Partners in Waste Management Investigation

In a related story, the Illinois Department of Professional Regulation has filed complaints against four Andersen partners in connection with their role in auditing Waste Management Inc. The complaint includes a recommendation asking that their licenses be revoked or suspended. Only one of the four partners is still with Andersen. A hearing is scheduled in Chicago on April 22.