Waste Management
On February 24, 1998 Waste Management Inc. (NYSE:WMX) reported that it would restate comprehensive earnings for 1992 through 1996 and adjust earnings for the year ending 1997. Following months of speculation regarding aggressive accounting practices, management resignations, and institutional shareholder persuasion, Waste Management adjusted their accounting practices and recognized billions of dollars in income adjustments. With all of the external criticism, Waste Management appointed an audit committee to examine accounting practices and compare these methods to other firms in the industry. The examination resulted in adjustments to expenses and restatements cumulatively totaling $3.5 billion pre-tax and $2.9 billion after-taxes.
The interim CEO, Robert Miller stated "The actions we are announcing reflect our determination to comprehensively address and definitively resolve the financial reporting issues affecting our Company and its credibility with investors. The steps we are taking are the strong prescription we believe is needed to acknowledge past mistakes, clarify our financial reporting picture, and begin the process of restoring investor confidence."
RESTATEMENTS
Based on the results of the comprehensive financial audit, management and the audit committee determined that certain material items were incorrectly reported. Most restatements were related to aggressive calculations of vehicle, equipment and container depreciation expense and capitalized interest. By increasing depreciation salvage value assumptions for vehicle and container assets, the Waste Management was postponing and avoiding depreciation expenses effectively raising current income.
The matters reflected in prior-period restatements include earlier recognition of asset value impairments (primarily related to land, landfill and recycling investments) and environmental liabilities (primarily landfill closure and postclosure expense accruals). It was also determined that capitalized interest relating to landfill construction projects had been miscalculated. When a company begins a construction project, as long as the project is not earning revenues, the company is able to accrue the interest expense related to the project and record it as part of the costs of construction (asset account not an expense). Basically the interest expense on construction becomes part of the constructed assets and can be depreciated over the useful life of the project. This is a common practice, but if interest expenses for construction projects are overstated, then expenses are being understated and capitalized interest is overstated.
ACCOUNTING CHANGES
In addition to restatements, Waste Management also shortened the depreciable lives of certain assets to reflect their current anticipated useful lives and has eliminated salvage value for trucks and waste containers. These changes conform to industry standards and will more accurately represent depression expenses going forward.
These actions were the direct result of the reorganization of the board of directors, a new audit committee, and new management team. The company ousted the previous management team and recognized all of the past problems at one time so as to minimize the damage going forward. It became a creditability issue with investors and this was the only way to restore the company's credibility in financial reporting. Following the announcement, Waste Management's stock regained some of the ground that it sacrificed over the previous five months.
The chart below shows the poor stock performance of Waste Management between 1993 and 1998. The stock traded within a fifteen point trading range for five years netting investors vitually no capital gains over the period. This is compared with the S&P 500, which doubled in value over the same holding period.
By Blake Hallinan
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