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Corporate Accounting Scandals: Waste Management, Enron, Tyco

Learn about infamous scandals involving financial fraud at Waste Management, Enron, and Tyco, uncovering the culprits, mechanisms, discovery, settlements, and penalties.

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Corporate Accounting Scandals: Waste Management, Enron, Tyco

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  1. Presentation to: Joint Accounting Conference May 17, 2018 Presented by: Daniel Kaufmann

  2. Misappropriation of Assets The Sting

  3. Top U.S. Corporate Accounting Scandals Waste Management Enron Tyco WorldCom HealthSouth Freddie Mac American Insurance Group

  4. Waste Management (1998) Company Background • Comprehensive Waste Management Company founded in 1894 • Based in Houston, Texas • Publicly Traded • Company offered environmental services to almost 20 million customers in America, Canada, and Puerto Rico • By the 1980s it was the largest waste management and environmental services company in the U.S.

  5. Waste Management (1998) Summary of the Fraud • Financial fraud occurred between 1992 and 1997 • Reported $1.7 billion in fake earnings • In 1998, the Company restated its 1992 – 1997 earnings by $1.7 billion • Largest restatement in history at that time • Scandal was an attempt to meet predetermined earnings targets by expanding profits and pushing down expenses.

  6. Waste Management (1998) Culprits • Founder/CEO/Chairman Dean Buntrock • Former President Philip Rooney • Chief Accounting Officer Thomas Hau • Chief Financial Officer James Koenig • General Counsel Herbert Getz • V.P. of Finance Bruce Tobecksen • Arthur Andersen (Auditors)

  7. Waste Management (1998) Mechanisms of the Fraud • Avoided depreciation expenses by assigning and inflating salvage values and extending the useful lives of garbage trucks • Refrained from recording expenses for any decreases in the value of the landfills as they were filled with waste • Refused to record necessary expenses to write off the costs of unsuccessful and discarded landfill development projects • Assigned salvage values to assets that previously had no salvage value • Increased environmental reserves to avoid irrelevant operating expenses • Improperly capitalized certain expenses

  8. Waste Management (1998) Discovery of the Fraud • The new CEO and management team combed through the financial records of the Company.

  9. Waste Management (1998) Settlements and Penalties • Waste Managements settled a shareholder class action lawsuit for $457 million • Arthur Andersen was fined $7 million by SEC

  10. Waste Management (1998) Interesting Facts • The new CEO created an anonymous company hotline for employees to report dishonest or improper behavior • The shareholders lost more than $5 billion of investments when stock price plunged by 35%

  11. Enron (2001) Company Background • Based in Houston, Texas • Publicly Traded • Formed in 1985 as a merger of Houston Natural Gas and Internorth • Commodities, Energy, and Service Corporation

  12. Enron (2001) Summary of the Fraud • Enron issued a restatement in 2001 for the 1997 through 2000 financial statements • Earnings for this period were reduced by $613 million • Liabilities were increased by $628 million • Equity was reduced by $1.2 billion • Enron files the nation’s largest bankruptcy • Enron’s shareholders lose over $74 billion

  13. Enron (2001) Culprits • CEO Jeff Skilling • Former CEO Ken Lay • CFO Andrew Fastow • Arthur Andersen

  14. Enron (2001) Mechanisms of the Fraud • Created off balance sheet Special Purpose Entities (SPE) to hide debt and bad assets • Enron would park its troubled assets with the SPE to get them off the balance sheet • Enron created thousands of SPEs • Enron also disguised bank loans as energy derivative trades to conceal the extent of its indebtedness

  15. Enron (2001) Discovery of the Fraud • Sherron Watkins blew the whistle • High stock prices fueled suspicions

  16. Enron (2001) Settlements and Penalties • Ken Lay was convicted of six counts of fraud and conspiracy • Jeff Skilling was sentenced to 24 years in prison • Enron filed for bankruptcy • Andrew Fastow pled guilty to two counts of wire fraud and securities fraud • Arthur Andersen was found guilty of obstruction of justice

  17. Enron (2001) Interesting Facts • Fortune Magazine named Enron “America’s Most Innovative Company” for six years in a row prior to the accounting scandal • Enron’s stock peaked at $90.75 per share; the shares were trading at $0.26 when it declared bankruptcy • The Enron Scandal helped usher in the Sarbanes-Oxley Act

  18. Tyco (2002) Company Background • New Jersey Based Company • Swiss Security System Company • Publicly Traded

  19. Tyco (2002) Summary of the Fraud • CEO, CFO, and General Counsel stole $170 million from the Company • CEO and CFO inflated the Company’s income by $150 million

  20. Tyco (2002) Culprits • CEO Dennis Kozlowski • CFO Mark Swartz • General Counsel Mark Belnick

  21. Tyco (2002) Mechanisms of the Fraud • CEO and CFO spent millions of dollars of Company money on personal expenses • Stole money through unapproved loans and executive stock sales • Money was misappropriated from the Company through improper executive bonuses and benefits • Tyco did have an employee loan program. However, the fraudsters took unapproved loans and kept them off the Company’s books. • Fraudsters limited internal audits access to documents and bypassed the legal department when making securities filings

  22. Tyco (2002) Discovery of the Fraud • SEC started investigating when the Company restated its 1999 earnings • SEC and Manhattan District Attorney investigations uncovered improper loans to CEO Kozlowski that had been forgiven ($19 million loan)

  23. Tyco (2002) Settlements and Penalties • CEO was sentenced to 25 years and fined $70 million • CFO were sentenced to 8 years and fined $35 million • Tyco had to pay $2.92 billion to investors

  24. Tyco (2002) Interesting Fact • CEO hosted a $2 million birthday party for his wife on an island (Sardinia) complete with a performance by Jimmy Buffett.

  25. WorldCom (2002) Company Background • Telecommunications Company • Long-distance telephone and data service provider • Publicly Traded

  26. WorldCom (2002) Summary of the Fraud • Company inflated assets by $30 billion • Fraud cost investors $180 billion in losses • Stock dropped from a high of $64 per share to a low of $0.10 per share

  27. WorldCom (2002) Culprits • CEO Bernie Ebbers • CFO Scott Sullivan • Controller David Myers

  28. WorldCom (2002) Mechanisms of the Fraud • Improperly capitalized expenses • Company took fees associated with third-party networks and service agreements (“Line Costs”) and booked them as capital expenditures ($3.8 billion in fraud) • The fraud led to artificial inflation of net income and EBITDA • Inflated revenues with fake accounting entries • Company also announced that it manipulated its reserve accounts to the tune of $3.8 billion (“Cookie Jar Reserves”)

  29. WorldCom (2002) Discovery of the Fraud • The Company’s internal auditors uncovered $3.8 billion of the fraud

  30. WorldCom (2002) Settlements and Penalties • CEO was sentenced to 25 years in prison for fraud, conspiracy, and filing false documents with regulators

  31. WorldCom (2002) Interesting Fact • WorldCom scandal was a driving factor for Congress’ passing of the Sarbanes-Oxley Act

  32. HealthSouth (2003) Company Background • Birmingham Based Company • Publicly Traded • Health Care Company

  33. HealthSouth (2003) Summary of the Fraud • Earnings were overstated every quarter between 1996 and 2002 to meet Company’s Wall Street expectations • Fraudsters overstated earnings by $2.6 billion

  34. HealthSouth (2003) Culprits • CEO Richard Scrushy • CFO Aaron Beam • CFO William Owens • CFO Weston Smith • CFO Michael Martin • Controller Ken Livesay

  35. HealthSouth (2003) Mechanisms of the Fraud • The “family” would get together after the books had closed and review the “gap” between real earnings and Wall Street estimates. • The fraudsters would then create millions of accounting entries under $5,000 to avoid audit scrutiny • Fraudsters improperly capitalized expenses, overestimated insurance reimbursements, overvalued fixed assets, and used faulty reserve accounting • Company denied requests from Ernst & Young to have unfettered electronic access to the general ledger

  36. HealthSouth (2003) Discovery of the Fraud • Richard Scrushy sold $75 million of Company stock one day before the Company posted a huge loss • Stock sale brought on an SEC investigation • Two of the CFOs agreed to cooperate with the FBI

  37. HealthSouth (2003) Settlements and Penalties • Richard Scrushy was acquitted of all 36 counts of financial fraud • However, Scrushy would later being convicted of bribing the Governor for a seat on CON Board • Scrushy would be sentenced to 7 years in prison

  38. HealthSouth (2003) Interesting Fact • Richard Scrushy is now a motivational speaker • Former CFOs Aaron Beam and Weston Smith give lectures on ethics in accounting

  39. Freddie Mac (2003) Company Background • Federally supported mortgage financing company • Chartered by federal government in 1970 to stabilize the nation’s mortgage markets • It is a Government Sponsored Enterprise (GSE) • Publicly Traded Company • One of the biggest buyers of home mortgages

  40. Freddie Mac (2003) Summary of the Fraud • Company committed financial fraud to meet Wall Street expectations for earnings • Company misstated $5 billion in earnings • Restated net income for 2001 alone was reduced by $1 billion

  41. Freddie Mac (2003) Culprits • President/COO David Glenn • CEO Leland Brendsel • CFO Vaughn Clark

  42. Freddie Mac (2003) Mechanisms of the Fraud • The Company “smoothed out” current earnings through questionable interpretations of GAAP • The Company hid more than $1 billion in profits in order to show “steady earnings” • Classification of Securities – the Company improperly classified bonds as “Held to Maturity” instead of “Available for Sale” • Accounting for Derivatives – the Company should have accounted for its derivatives as “speculative positions” instead of as accounting hedges

  43. Freddie Mac (2003) Discovery of the Fraud • SEC Investigation

  44. Freddie Mac (2003) Settlements and Penalties • Company fined $125 million • Officers of Company terminated • The Company paid $410 million to settle class action brought by pension funds and investors

  45. Freddie Mac (2003) Interesting Fact • The next year Fannie Mae was caught in an equally stunning mortgage financing scandal

  46. American Insurance Group (2005) Company Background • Multinational Insurance Giant • World’s Largest Insurance and Financial Services Company • 93,000 Employees • Business in 130 Countries

  47. American Insurance Group (2005) Summary of the Fraud • Massive accounting fraud to the tune of $3.9 billion

  48. American Insurance Group (2005) Culprits • CEO Hank Greenberg

  49. American Insurance Group (2005) Mechanisms of the Fraud • AIG booked $500 million in loans as revenue • AIG instructed traders to inflate stock price • AIG directed clients to insurers AIG had paid off

  50. American Insurance Group (2005) Discovery of the Fraud • SEC regulator investigations (possibly after a tip from a whistleblower)

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