Cendant Corporation (Cendant). On December 17, 1997, CUC International merged with HFS Incorporated to form Cendant. Cendant
Question:
Cendant Corporation (Cendant). On December 17, 1997, CUC International merged with HFS Incorporated to form Cendant. Cendant operates primarily in three business segments—alliance marketing, travel, and real estate services. Cendant franchises include Century 21, Coldwell Banker, Avis, Days Inn, and Ramada Inn. Cendant, headquartered in Stamford, Connecticut, and Parsippany, New Jersey, has nearly 40,000 employees, operates in over 100 countries, and makes more than 100 million customer contacts annually.
In April 1998, Cendant issued a press release stating that CUC had committed a massive accounting fraud. The press release stated that 1997 earnings were overstated by as much as $115 million. Cendant’s audit committee hired Arthur Andersen (AA) to investigate the fraud. AA’s report, issued in August 1998, revealed that CUC’s chief executive officer
(CEO) and chief operating officer (COO) created a culture that accepted fraudulent accounting activities and failed to implement appropriate controls and procedures that might have deterred or detected the fraud. Additional details from AA's report are summarized below (Source: C. J.
Loomis, “Lies, Damned Lies, and Managed Earnings,” Fortune, August 2, 1999, pp. 74-92):
e In the three years 1995-97, CUC’s operating income before taxes was improperly inflated by $500 million, which was more than one-third of its reported pretax income for those years.
¢ Though many of the improprieties occurred in CUC’s biggest subsidiary, Comp-U-Card, they reached to 16 others as well. No fewer than 20 employees participated in the wrongdoing.
e Several CUC employees who were interviewed said they understood that the purpose of inflating earnings was to meet “analysts’ expectations.”
e In the first three quarters of each of the affected years, CUC put out unaudited financial statements that headquarters deliberately falsified, mostly by “adjusting” Comp-U-Card’s revenues upward and its expenses downward. These favorable “adjustments” grew: They were $31 million in 1995, $87 million in 1996, and $176 million in 1997.
Step by Step Answer:
Auditing And Assurance Services A Systematic Approach
ISBN: 9780073337203
5th Edition
Authors: William Messier, Steven Glover, Douglas Prawitt