Accounting Firm Fine a Record

Accounting giant Arthur Andersen agreed to pay $7 million to settle charges it filed false and misleading audit reports of Waste Management Inc. in which the No. 1 U.S. trash-hauler overstated income by more than $1 billion, federal regulators said Tuesday.

The fine was the largest-ever civil penalty against a Big 5 accounting firm, said the Securities and Exchange Commission in announcing the settlement against Arthur Andersen and four of its current or former partners.

Publicly traded companies are required to hire an accounting firm to go over books using generally accepted accounting principles. The firms are supposed to raise any concerns with management and issue opinions about the audits.

Arthur Andersen, which did not admit or deny the SEC charges, examined Waste Management’s books from 1992 through 1996, and issued audit reports that falsely claimed that the statements had been prepared using generally accepted standards, the SEC said.

The agency added that the Waste Management financial statements that Arthur Andersen blessed had overstated the Houston-based trash company’s pretax income by more than $1 billion.

“Arthur Andersen and its partners failed to stand up to company management and thereby betrayed their ultimate allegiance to Waste Management’s shareholders and the investing public,” said Richard Walker, the SEC’s top cop.

In addition to the $7-million fine, Arthur Andersen agreed to what the SEC said was the first anti-fraud injunction in more than 20 years against an accounting giant. It also agreed to be censured.

“This settlement allows the firm and its partners to close a very difficult chapter and move on,” Chicago-based Arthur Andersen said in a statement.

“The allegations underlying the settlement are limited to one client and reflect work that is in some cases more than seven years old,” it added.

Arthur Andersen has served as Waste Management’s auditors since before it became a public company in 1971. The company merged in 1998 with USA Waste Services Inc., and the surviving entity took the Waste Management name.

Arthur Andersen still audits its books, a Waste Management spokeswoman said.

The company said in a statement that Tuesday’s settlement stemmed from an SEC investigation of the “old” Waste Management’s 1998 restatement of annual financial documents from 1993 through 1996 that were audited by Arthur Andersen.