(FORTUNE Magazine) – The sprawling lobby at the worldwide headquarters of Waste Management, in the Chicago suburb of Oak Brook, Ill., betrays precious little evidence of what once made the company great. There are no pictures of employees rising before dawn to pick up America's trash. No models of the company's trademark burgundy garbage trucks. No oversized portraits of the company's co-founders, Wayne Huizenga and Dean Buntrock, who were the first to figure out that local trash hauling, operating on a national scale, could be a hugely profitable business.

But on the lobby receptionist's desk stands a telling symbol of what brought it all crashing down: a small board displaying Waste Management's most recent closing stock price. Since going public in 1971, Waste Management has been obsessed with its stock price--and for much of that time it was a happy obsession. In the 1980s, Waste positioned itself as a classic growth company, and its shares soared. It was Wall Street's favorite garbage hauler. But then came the 1990s, and that obsession became its curse.

Early this year Waste Management stunned the investment community by announcing a mammoth pretax charge of $3.54 billion. In effect, that was the payment for the company's accumulated sins during the decade. The primary sin, the company revealed, was having used improper, overly aggressive accounting tactics in an effort to boost sagging earnings. This had been going on for so long that the company had to restate earnings back to 1992. Not surprisingly, the SEC began an investigation into both Waste Management and its longtime auditor, Arthur Andersen. On March 11 came the denouement: Waste Management agreed to be taken over by a much smaller rival, USA Waste Services, in a $13.5 billion deal. Not many years before, USA Waste had been operating a single garbage dump in Norman, Okla.

It's always tempting to view a story like this one as an aberration--a singular event revolving around a company gone bad. Sadly, that's probably not the case. Waste Management did the things it did because it refused to concede that it was no longer a hot growth company. Its desire to retain its status as a Wall Street highflier drove Waste Management not just to inflate its numbers but also to make a whole host of wrong-headed decisions.

Recently another Wall Street highflier, Cendant, announced that it would have to restate earnings as a result of accounting problems that had been uncovered. Yes, the restatement will be smaller than Waste's, and yes, the problems occurred at a company that Cendant only recently acquired. Still, the trend is a troubling one. At a time when quarterly earnings have never been more important--and the punishment for disappointing the Street never more severe--the temptation to boost earnings by using accounting gimmicks can be powerful. And so is the temptation to allow the business to be driven by the stock price, rather than the other way around. "The stock should be the product of how you do business," says Steve Miller, an outside Waste director brought in as acting CEO, "not the god you pay homage to every day."

There is a tendency to think of Waste Management primarily as the first company Wayne Huizenga built, and that's not entirely wrong. Waste is where Huizenga, a South Florida garbage hauler before co-founding the company in 1968, pioneered his empire-building technique: snapping up mom-and-pop operations in a single industry and stitching them together into a giant national business--a model he would later employ at Blockbuster (video stores) and Republic Industries (car dealers).

But it was never a solo act. In fact, on the organizational chart Huizenga, the company president, played second banana to Buntrock, who served as chairman and CEO. A former insurance salesman utterly lacking his co-founder's dynamism, Buntrock was nonetheless instrumental in establishing the Waste Management culture--proud to the point of arrogance and addicted to growth--as well as its core strategy. In fact, the company really went into overdrive only after Huizenga left in 1984. That year Waste hit $1.3 billion in revenues. Six years later revenues stood at more than $6 billion, and net income had quadrupled.

That, of course, is the kind of growth Wall Street looks for--and rewards. As earnings climbed, so did the stock price, rising from $3.41 in 1984 (split-adjusted, of course) to a peak of $46.63 in 1992. The stock enjoyed a growth-company multiple, its P/E breaking into the mid-30s. Investment bankers drooled over the prospect of Waste Management's business--the company was doing upwards of 100 acquisitions a year--while analysts wrote glowing buy recommendations. "Waste Management was like Intel today," recalls CIBC Oppenheimer analyst Doug Augenthaler: "It was the quality growth name."

Yet even as it was basking in its status, Waste realized it couldn't keep growing the way it had. It was so big that it couldn't buy enough smaller companies to keep up the frenetic pace. By the early 1990s, Waste needed to deal with a new reality: It couldn't be a growth company anymore.

Or could it? "For 20 years, we had double-digit growth," Buntrock told FORTUNE, in his first interview since the accounting problems came to light. "The marketplace and shareholders and even your own employees expect you to continue that. You expect it yourself. My job was to have a strategy that allowed it to continue to grow."

His strategy was to diversify. Starting in the late 1980s, Buntrock moved Waste heavily into hazardous-waste disposal, recycling, water treatment, even lawn care. And he expanded massively overseas. Then, pleased with what he had done, Buntrock recast the company as a portfolio of global environmental-services businesses, complete with a sexy new name: WMX Technologies.

Unfortunately, Buntrock's strategy failed on virtually every count. The company overpaid for acquisitions abroad; the hazardous-waste business declined; recycling produced lousy returns. And while the new WMX certainly got big--with assets of more than $16 billion and some 73,000 employees--it wasn't exactly fast-growing. On the contrary, the bigger it got, the easier it became for smaller, nimbler competitors to compete for customers in the highly profitable core trash business.

Yet Buntrock refused to change course. Nigel Wilson, who joined Waste in 1993 as finance director for international operations, thought there might be another strategy for the company, revolving around tough cost cutting. "There wasn't a ruthlessly aggressive cost cutter anywhere in the business," he says. After writing a memo to that effect, Wilson was summoned to London during a family vacation on the Canary Islands so that Buntrock lieutenants, who had flown in from company headquarters in Oak Brook, could tear apart his recommendations. Wilson left the company after two years.

With the strategy failing, Buntrock began mishandling Wall Street. Instead of lowering expectations, he continued to promise turbocharged earnings--then failed to deliver. In 1993 the company projected $10 billion in revenues but produced just $9.1 billion. Profits fell by almost 50%, while the stock sank to $23. And still Buntrock refused to acknowledge that things had changed. "We are a growth company!" he protested to angry investors at the 1994 annual meeting.

As the situation grew increasingly desperate, so did Waste's response. It began booking ordinary losses as one-time "special charges." To boost stock values it had set up four publicly traded subsidiaries, but the new structure was so unwieldy it had to be unwound a few years later. Buntrock and his protege, Waste President Phil Rooney, also ordered the company's fleet of garbage trucks and steel trash containers kept on the streets longer. As Buntrock concedes today (Rooney declined to comment), this was intended to boost earnings by cutting the capital budget. But it was terribly short-sighted because it meant the company was forced to spend millions to keep broken-down trucks on the road. Maintenance costs soared. One former divisional controller recalls having to swap desperately needed equipment with her counterparts, like Radar O'Reilly in M*A*S*H. "We were trading trucks all over God's creation," she says. "If someone needed 15 containers, I'd find the 15 containers for 'em, and they'd give me a truck. We'd tow a truck across three states to get it, so we could scavenge it for parts."

And finally, as we now all know, the company began cooking the books. Here's how it worked. Standard industry practice is to depreciate--or write down--the cost of trucks (about $150,000 apiece) over eight to ten years, with each year's depreciation expense reducing the bottom line. But in the early 1990s, at Rooney's direction and with Buntrock's assent, Waste began stretching the depreciation schedules by two to four years. This lowered the company's annual depreciation charge, boosting earnings. Waste also reduced by as much as $25,000 the starting depreciation amount on each truck, claiming that sum as "salvage value"--an amount it would recover by selling the vehicles. Standard industry practice is to claim no salvage value. On a North American fleet of nearly 20,000 vehicles, this manipulation added up.

The company engaged in similar shenanigans with its 1.5 million steel dumpsters. Waste listed their useful lives as between 15 and 20 years--12 is standard--and claimed salvage value on them as well, again contrary to industry practice. In some cases management kept two sets of books, imposing the questionable depreciation schedules at headquarters on assets that were valued properly in the field. "They were way out of the industry norm," says USA Waste CFO Earl DeFrates. "To be keeping two sets of books is just incredible. It scares the hell out of me." Between the dumpsters and the trucks, the accounting maneuvers inflated pretax profits by $716 million.

But that wasn't all. Waste Management owns 137 landfills, all of which require millions of dollars in up-front costs to buy the land, win the permits, and develop. Then, after a landfill is filled, millions more must be spent; federal regulations require treating the site and monitoring for contamination for 30 years. The accounting treatment of these costs is determined by the probable life of the landfill. Obviously, expansion makes a landfill considerably more profitable by extending its useful life and spreading the capital cost--charged on the books as capitalized interest and depreciation--over a much longer period.

So what did Waste Management do? Naturally, it claimed that landfill expansions were likely--even when they weren't. For its Live Oak landfill in Atlanta, for example, the company's books counted on a huge increase in capacity--even after the state had passed a law barring any expansion! Thus was the site's value inflated by $30 million. Overall, charges for overvalued landfill projects totaled more than $700 million. And on and on. Recycling facilities, hazardous-waste plants, engineering operations--all were massively overvalued, artificially brightening the balance sheet. Taken together, the gimmicks boosted reported earnings by $110 million or more each year. (Replies Buntrock: "To my knowledge, there was proper accounting used on all our financial transactions.")

But here's the pathetic part: It didn't work. Earnings remained volatile at best, and the company's relations with Wall Street soured. Back in 1991, Paul Knight, an industry analyst with NatWest, had presciently placed a sell rating on the company. "It was like putting a sell on Microsoft," he says now. "Everybody hated me." But as Waste continued to disappoint, and the stock drifted into the mid-20s, other analysts joined in. Soon Waste Management was a Wall Street pariah. Bottom fishers and shortsellers moved in. And so did a new--and far more troublesome--kind of investor.

Nell Minow is a CEO killer. A 46-year-old lawyer, she is a principal at LENS, a Washington, D.C., investor group. Along with her partner, Bob Monks, she invests in the worst-run companies in America. Their strategy is to agitate for change--always noisily, through the press. Lens isn't very big; it has $100 million today but had only $35 million when it first targeted Waste Management. Yet the firm's kill rate is remarkable. Of the first ten companies it went after--including American Express, Kodak, and Westinghouse--nine replaced their CEOs.

Minow first took aim at Waste Management in 1995. Even without the disclosure of the accounting problem--still more than two years away--Waste was a classic LENS investment: an arrogant company that had lost its way and whose stock was going nowhere. Minow always likes to start by looking at the board, and Waste's offered an easy target. It included five current or former company executives, plus Buntrock's personal attorney. Three of the outside directors--or the institutions they ran--received fees or contributions from the company. "It was such a sound bite," Minow says now: "'Two-thirds of the board is on the payroll.'"

By 1996, Minow had enlisted a powerful ally, George Soros, whose hedge funds bought $1 billion of the stock. LENS was demanding the appointment of independent directors and pushing for the sale of noncore assets. Waste's top executives had also become targets: LENS wanted Buntrock, 65, to retire as chairman and CFO James Koenig fired. (Koenig could not be reached for comment.) Soros' operatives demanded that Rooney, who had just stepped in as CEO, be replaced, bluntly branding him "inadequate."

And within a year and half, after the usual round of angry meetings and threats of proxy fights, LENS and Soros appeared to have won just about everything they wanted. Waste had started adding independent directors, including Steve Miller, a former Chrysler vice chairman who had fashioned a second career putting out fires at deeply troubled companies. Waste had begun a sizable restructuring, including 3,000 layoffs, the sale of $2.5 billion in assets, and the restoration of the old Waste Management name. Koenig had been reassigned. And in mid-February 1997, Rooney quit, after just eight months as CEO. Miller, the new board member, led the search for a new CEO. In July the company had its savior: Ronald T. LeMay, 51, the No. 2 man at Sprint. Or so everyone thought.

He lasted less than four months. Granted an extraordinarily generous pay package--including a guarantee that Waste would cover up to $68 million in appreciation of the Sprint options he had to give up--LeMay nonetheless departed abruptly in late October, returning on a Sprint corporate jet to his old job. ("I'm out of here this afternoon," LeMay told Miller when he gave him the news.) At the time it all seemed very mysterious; to this day LeMay has never spoken publicly about why he abandoned ship with such haste.

But in retrospect, it doesn't seem all that mysterious. LeMay had stumbled onto the accounting problems. On Oct. 10, he announced that Waste wouldn't be able to meet Wall Street expectations for the quarter--again. But he also warned, ominously, that there were accounting issues that might require a special charge. He left a few days after the quarterly results were released. The same day Waste's new CFO also quit. The stock plunged 20%.

From that point on, it was only a matter of time before the rest of the world found out. Unwilling to turn again to Buntrock, who was still on the board (but would leave by year's end), the directors named Miller acting chairman and CEO.

Miller quickly announced yet another "sweeping" restructuring (the company's second that year alone) and launched the search for a new CEO (it had already had four since January). But the most important thing he did was to begin digging into the financial problems. He tapped a new outside director to help him: former SEC chairman Rod Hills.

"It was apparent that we had a real problem the day I became chairman of the audit committee," Hills tells FORTUNE. He and Miller immediately hired a new acting CFO and demanded a fresh audit team from Arthur Andersen, Waste's longtime accountants. But of course Andersen's own conduct was also at issue--why hadn't it stopped the accounting games, or at least called attention to them? Although Andersen denies culpability, Hills has no reluctance pointing to it as part of the problem. "The SEC is going to find that they didn't do their jobs," he says bluntly. (Responds Matthew P. Gonring, an Andersen managing partner: "We take exception to preinvestigative inappropriate finger pointing.") Ultimately, Ernst & Young was also brought in to look over the books.

After four months the company unveiled the results of its audit, and they were grim indeed: a pretax charge of $3.54 billion--which even Buntrock calls "staggering." (After tax, it comes to $2.9 billion.) The adjustments made 1997 the worst year in the company's history, with a loss of $1.18 billion. Reported profits of $192 million in 1996 became a loss of $39 million. Another $904 million in net income was erased for prior years. Nearly three-quarters of shareholders' equity--some $3.6 billion--vanished overnight. "I don't think there's anything comparable to it," says Hills.

In the wake of the announcement, a new question swirled around Waste Management. The question had once been: Can Waste Management get back on the fast-growth track? Now it was: Can Waste survive as an independent company? The answer turned out to be no. For years Buntrock had brusquely turned aside all overtures. But now he was a marginal player; deals could be done without him. Soros, desperate to boost the stock, met in Florida with Wayne Huizenga, where, according to a Huizenga camp confidant, the former Waste founder--already back in the trash business with Republic Industries--briefly entertained the idea of taking a run at his old company. (Huizenga declined to comment.)

A more serious suitor was USA Waste, run by a tough, ambitious executive named John Drury. In the space of just four years, Drury, 53, had built his little Houston-based company into the industry's third largest. Drury, in fact, was among those Buntrock had dismissed in the past. After LeMay left, however, USA Waste secretly took a minority position in a partnership that bought 13 million Waste shares. Drury met with Miller twice to make a sales pitch and sent emissaries to New York to drum up support among Waste's big institutional investors.

By early January--with the full extent of the accounting problems soon to be revealed--the Waste board was ready to listen. Drury and his team promised they could quickly produce $800 million in annual cost savings from the combination. After the usual head-knocking over the numbers (the accounting revelations dropped the purchase price by $900 million), the two sides reached a deal by the end of February. Buntrock, who hated to see his company merged and thought the price far too cheap, privately lobbied individual Waste directors to reject the agreement, but no one was listening. Buntrock says he is not surprised at his company's fate, given Waste's inability to solve its own problems. "In many respects," he says candidly, "we had more time than we should have been given."

On the morning of March 11, the deal was announced. The new company would have 20% of the North American trash business, with 319 dumps and 650 collection operations. Drury pledged to make revenues grow 10% and profits 20% for years to come. So now it's his turn to make Waste Management into a growth company again. For now, at least, the Street is willing to believe. When trading opened, Waste's shares soared.

You'd think, after everything that's happened, the culture at Waste Management would be humbled--thankful, even, to have been saved from its own miscues by USA Waste. But you would be wrong. As always at Waste Management, there was an appetite for self-delusion.

That much was painfully obvious when Steve Miller, on the day of the big announcement, entered an Oak Brook auditorium packed with panicked corporate staff to talk about the new arrangement. Waste Management wasn't really being acquired, he claimed. The new business would carry the Waste Management name, and Waste would provide half the directors. "You can forget any notion that we are selling the company," Miller declared. "Hogwash! Look out any window--any window--and you're going to see those burgundy trucks proudly rolling."

Drury, who will serve as the new company's CEO (and after one year as its chairman), treated the Waste crowd gently that day. Three weeks later, at his own headquarters back in Houston, he was less deferential. A big chunk of the promised $800 million in savings, he made clear, will come out of Oak Brook. Waste's entire bloated headquarters operation--four buildings filled with 1,300 employees--will be shut down. Drury manages USA from three leased floors in a downtown office tower, with a central staff of 130. He has always believed in decentralized operations--and sticking to basics. "It's a simple business," he says. "We don't know that we're real good at a lot of things. But we're damn good at picking up garbage."

In this merger of unequals, there's no question who's coming out on top. "There can be only one culture," Drury notes bluntly. "It's going to be our culture." And as for those trademark burgundy trucks, which Miller insisted everyone would continue to see "proudly rolling"? "The trucks are definitely going to be green"--USA Waste's color, says Drury. "Their trucks are ugly."

REPORTER ASSOCIATE Rajiv M. Rao