• The PowerPoint presentation must be at least 20 slides in length; 10-12 point font; double-spaced; andinclude a cover page, introduction, body, summary or conclusion, and works cited slides.
• Although this is not a scientific-type writing assignment, and is mostly creative in nature, references are still very important. At least six authoritative, outside references are required (anonymous authors or Web pages are not acceptable). These should be listed on the last slide titled "Works Cited" or "References," depending on theformat standard used.
• AppropriatecitationsarerequiredthroughoutthePowerPointpresentation.

This presentation addresses material covered in all weeks and all TCOs. Instead of a written final exam, you will work to read, analyze, and evaluateMajor Case 4, Cendant Corporation, pages 468-474. Your grade will be based on a PowerPoint presentation, which isto be submitted in Week 8.

• Answer the questions 1?4 at the end of the case (pp. 468-474) in terms of the concepts we study in Weeks 1 to 7 (through Weeks 2 to 7): Six Pillars of Character and Modern Moral Philosophies (Chapter 1)Professional Judgment in Accounting and the Decision-making Process (Chapter 2)Corporate Governance, Codes of Ethics, and Ethical Management (Chapter 3)Accounting Codes of Conduct and Standards (Chapter 4)Audit Responsibilities and Accounting Fraud (Chapter 5)Legal and Regulatory Obligations in an Ethical Framework (Chapter 6)Earnings Management and the Quality of Financial Reporting (Chapter 7)International Financial Reporting (Chapter 8)

Major Case 4 (for use with Chapters 1-7) Cendant Corporation1 The Merger of HFS and CUC HFS Incorporated (HFS) was principally a controller of franchise brand names in the hotel, real estate brokerage, and car rental businesses including Avis, Ramada Inn, Days Inn, and Century 21. Comp-U-Card (CUC) was principally engaged in membership-based consumer services such as auto, dining, shopping, and travel \"clubs.\" Both securities were traded on the NYSE. Cendant Corporation was created through the December 17, 1997, merger of HFS and CUC. Cendant provided certain membership-based and Internet-related consumer services and controls franchise brand names in the hotel, residential real estate brokerage, car rental, and tax preparation businesses. 1 The information for this case comes from a variety of litigation releases on the SEC Web site including: www.sec.gov/litigation/admin/34-42935.htm (June 14, 2000); www.sec.gov/litigation/admin/3442934.htm (June 14, 2000); www.sec.gov/litigation/admin/34-42933.htm (January 24, 2001); www.sec.gov/litigation/litreleases/lr16587.htm (April 30, 2003); and www.sec.gov/litigation/complaints/comp18102.htm (April 30, 2003). Overview of the Scheme The Cendant fraud was the largest of its kind until the late 1990s and early 2000s. Beginning in at least 1985, certain members of CUC's senior management implemented a scheme designed to ensure that CUC always met the financial results anticipated by Wall Street analysts. The CUC senior managers utilized a variety of means to achieve their goals including: Manipulating recognition of the company's membership sales revenue to accelerate the recording of revenue Improperly utilizing two liability accounts related to membership sales that resulted from commission payments Consistently maintaining inadequate balances in the liability accounts and on occasion reversing the accounts directly into operating income With respect to the last item, to hide the inadequate balances, senior management periodically kept certain membership sales transactions off-books. In what was the most significant category quantitatively, the CUC senior managers intentionally overstated merger and purchase reserves and subsequently reversed those reserves directly into operating expenses and revenues. CUC senior management improperly wrote off assetsincluding assets that were unimpairedand improperly charged the write-offs against the company's merger reserves. By manipulating the timing of the writeoffs and by improperly determining the nature of the charges incurred, the CUC senior managers used the write-offs to inflate operating income at CUC. As the scheme progressed over the course of several years, larger and larger year-end adjustments were required to show smooth net income over time. The scheme added more than $500 million to pretax operating income during the fiscal years ended January 31, 1996; January 31, 1997; and December 31, 1997. SEC Filings against CUC and Its Officers SEC complaints filed on June 14, 2000, alleged violations of the federal securities laws by four former accounting officials including Cosmo Corigliano, CFO of CUC; Anne M. Pember, CUC controller; Casper Sabatino, vice president of accounting and financial reporting; and Kevin Kearney, director of financial reporting. The allegations against Corigliano included his role as one of the CUC senior officers who helped engineer the fraud, and he maintained a schedule that management used to track the progress of their fraud. Corigliano regularly directed CUC financial reporting managers to make unsupported alterations to the company's quarterly and annual financial results. The commission alleged that Corigliano profited from his own wrongdoing by selling CUC securities and a large number of Cendant securities at inflated prices while the fraud he helped engineer was under way and undisclosed. The commission alleged that Pember, the former CUC controller, was the CUC officer most responsible for implementing directives received from Corigliano in furtherance of the fraud including implementing directives that inflated Cendant's annual income by more than $100 million, primarily through improper use of the company's reserves. According to the SEC, Pember profited from her own wrongdoing by selling CUC and Cendant stock at inflated prices while the fraud she helped implement was under way and undisclosed. Sabatino and Kearney, without admitting or denying the commission's allegations, consented to the entry of final judgments settling the commission's action against them. The commission's complaint alleged that Sabatino was the CUC officer most responsible for directing lower-level CUC financial reporting managers to make alterations to the company's quarterly financial results. In the first of the three separate administrative orders, the commission found that Steven Speaks, the former controller of CUC's largest division, made or instructed others to make journal entries that effectuated much of the January 1998 income inflation directed by Pember. In a second separate administrative order, the commission found that Mary Sattler Polverari, a former CUC supervisor of financial reporting, at the direction of Sabatino and Kearney, regularly and knowingly made unsupported alterations to CUC's quarterly financial results. In a third administrative order, the commission found that Paul Hiznay, a former accounting manager at CUC's largest division, aided and abetted violations of the periodic reporting provisions of the federal securities laws by making unsupported journal entries that Pember had directed. Hiznay consented to the issuance of the commission's order to cease and desist from future violations of the provisions. In a fourth and separate administrative order the commission found that Cendant violated the periodic reporting, corporate recordkeeping, and internal controls provisions of the federal securities laws, in connection with the CUC fraud. Among other things, the company's books, records, and accounts had been falsely altered, and materially false periodic reports had been filed with the commission, as a result of the long-running fraud at CUC. Simultaneous with the institution of the administrative proceeding, and without admitting or denying the findings contained therein, Cendant consented to the issuance of the commission order, which ordered Cendant to cease and desist from future violations of the provisions. On February 28, 2001, the SEC filed a civil enforcement action in the U.S. District Court for the District of New Jersey against Walter A. Forbes, the former chair of the board of directors at CUC, and E. Kirk Shelton, the former vice chair, alleging that they directed a massive financial fraud while selling millions of dollars' worth of the company's common stock. For the period 1995-1997 alone, pretax operating income reported to the public by CUC was inflated by an aggregate amount of over $500 million. Specific allegations included: Forbes, CUC's chair and CEO, directed the fraud from its beginnings in 1985. From at least 1991 on, Shelton, CUC's president and COO, joined Forbes in directing the scheme. Forbes and Shelton reviewed and managed schedules listing fraudulent adjustments to be made to CUC's quarterly and annual financial statements. CUC senior management used the adjustments to artificially pump up income and earnings, defrauding investors by creating the illusion of a company that had ever-increasing earnings and making millions for themselves along the way. Forbes and Shelton undertook a program of mergers and acquisitions on behalf of CUC in order to generate inflated merger and purchase reserves at CUC to be used in connection with the fraud. Forbes and Shelton sought out HFS as a merger partner because they believed the reserves that would be created would be big enough to bury the fraud. To entice HFS management into the merger, Forbes and Shelton inflated CUC's earnings and earnings projections. Forbes and Shelton profited from their own wrongdoing by selling CUC and Cendant securities at inflated prices while the fraud they had directed was under way and undisclosed. The sales brought Forbes and Shelton millions of dollars in ill-gotten gains. After the Cendant merger, Forbes served as Cendant's board chair until his resignation in July 1998. At the time of the merger, Shelton became a Cendant director and vice chair. Shelton resigned from Cendant in April 1998. Specific Accounting Techniques Used to Manage Earnings Loosely speaking, earnings management occurs when a company determines its net income based on meeting desired goals rather than through the application of GAAP. Companies can manage earnings in a variety of ways including accelerating the recording of revenue, delaying the recording of expenses, adjusting write-offs and write-downs, and utilizing reserves to smooth net income over time. We discussed these techniques in Chapter 7. Making Unsupported Postclosing Entries In early 1997, at the direction of senior management, Hiznay approved a series of entries reversing the commissions payable liability account into revenue at CUC. The company paid commissions to certain institutions on sales of CUC membership products sold through those institutions. Accordingly, at the time that it recorded revenue from those sales, CUC created a liability to cover its commissions payable obligation. CUC senior management used false schedules and other devices to support their understating of the commissions payable liability and to avoid the impact that would have resulted if the liability had been properly calculated. Furthermore, in connection with the January 31, 1997, fiscal yearend, senior management utilized this liability account by directing post-closing entries moving amounts from the liability directly into revenue.2 In February 1997, Hiznay received a schedule from the CUC controller setting forth the amounts, effective back-dates, and accounts for a series of postclosing entries reducing the commissions payable account by $9.12 million and offsetting that reduction by increases to CUC revenue accounts. Hiznay approved the unsupported entries and had his staff enter them. They all carried effective dates spread retroactively over prior months. The entries reversed the liability account directly into revenues, a treatment that, under the circumstances, was not in accordance with GAAP. 2 Postclosing journal entries means entries that are made after a reporting period has ended, but before the financial statements for the period have been filed, and that have effective dates spread retroactively over prior weeks or months. Keeping Rejects and Cancellations Off-Books: Establishing Reserves During his time at CUC, Hiznay inherited, but then supervised, a long-standing practice of keeping membership sales cancellations and rejects off CUC's books during part of each fiscal year. Certain CUC membership products were processed through various financial institutions that billed their members' credit cards for new sales and charges related to the various membership products. When CUC recorded membership sales revenue from such a sale, it would allocate a percentage of the recorded revenue to cover estimated cancellations of the specific membership product being sold, as well as allocating a percentage to cover estimated rejects and charge-backs.3 CUC used these percentage allocations to establish a membership cancellation reserve. Over the years, CUC senior management had developed a policy of keeping rejects and cancellations off the general ledger during the last three months of each fiscal year. Instead, during that quarter, the rejects and cancellations appeared only on cash account bank reconciliations compiled by the company's accounting personnel. The senior managers then directed the booking of those rejects and cancellations against the membership cancellation reserve in the first three months of the next fiscal year. Because rejects and cancellations were not recorded against the membership cancellation reserve during the final three months of the fiscal year, the policy allowed CUC to hide the fact that the reserve was dramatically understated at each fiscal year-end. At its January 31, 1997, fiscal year-end, the balance in the CUC membership cancellation reserve was $29 million; CUC accounting personnel were holding $100 million in rejects and $22 million in cancellations off-books. Failing to book cancellations and rejects at each fiscal year-end also had the effect of overstating the company's cash position on its year-end balance sheet. 3 Rejects resulted when the credit card to be charged was over its limit, closed, or reported as lost or stolen. Charge-backs resulted when a credit card holder disputed specific charges related to a particular membership program. SEC Settlements Between Hiznay's arrival at CUC in July 1995 and the discovery of the fraudulent scheme by Cendant management in April 1998, CUC and Cendant filed false and misleading annual reports with the commission that misrepresented their financial results, overstating operating income and earnings and failing to disclose that the financial results were falsely represented. The commission's complaint alleged that Sabatino, by his actions in furtherance of the fraud, violated, or aided and abetted violations of, the antifraud, periodic reporting, corporate record-keeping, internal controls, and lying to auditors provisions of the federal securities laws. Sabatino consented to entry of a final judgment that enjoined him from future violations of those provisions and permanently bar him from acting as an officer or director of a public company. Kearney consented to entry of a final judgment that enjoined him from future violations of those provisions, ordered him to pay disgorgement of $32,443 in ill-gotten gains (plus prejudgment interest of $8,234), and ordered him to pay a civil money penalty of $35,000. Kearney has also agreed to the issuance of a commission administrative order that barred him from practicing before the commission as an accountant, with the right to reapply after five years. Corigliano, Pember, and Sabatino each pleaded guilty to charges pursuant to plea agreements between those three individuals and the SEC. Pursuant to his agreement, Corigliano pleaded guilty to a charge of wire fraud, conspiracy to commit mail fraud, and causing false statements to be made in documents filed with the commission including signing CUC's periodic reports filed with the commission and making materially false statements to CUC's auditors. Pember pleaded guilty to a charge of conspiracy to commit mail fraud and wire fraud. Sabatino, pursuant to his agreement, pleaded guilty to a charge of aiding and abetting wire fraud. In another administrative order, the commission found that Paul Hiznay aided and abetted violations of the periodic reporting provisions of the federal securities laws, in connection with actions that he took at the direction of his superiors at CUC. Among other things, the commission alleged that Hiznay made unsupported journal entries that Pember had directed. Additional orders were entered against lowerlevel employees. Actions against Cendant and Walter A. Forbes, Former Board Chair The commission found that Cendant violated the periodic reporting, corporate recordkeeping, and internal controls provisions of the federal securities laws, in connection with the CUC fraud in that the company's books, records, and accounts had been falsely altered, and materially false periodic reports had been filed with the SEC. On December 29, 2009, the SEC announced a final judgment against Walter A. Forbes, the former chair of Cendant, arising out of his conduct in the Cendant fraud.4 The commission alleged that Forbes orchestrated an earnings management scheme at CUC to improperly inflate the company's quarterly and annual financial results during the period 1995 to 1997. CUC's operating income was improperly inflated by an aggregate amount exceeding $500 million. The final judgment against Forbes, to which he consented without admitting or denying the commission's allegations, enjoined him from violating relevant sections of the securities laws and bars him from serving as an officer or director of a public company