the cendant corporation accounting scandal 2

THE CENDANT CORPORATION ACCOUNTING SCANDALBCOM21

TABLE OF CONTENTS

ACKNOWLEDGEMENT ………………………………………………………… 2

INTRODUCTION …………………………………………………………………. 3

SUMMARY ……………………………………………………………………….. 4-7

COMPANY PROFILE …………………………………………………………… 8

THE OFFICERS INVOLVE …………………………………………………….. 9-15

DISCUSSION ……………………………………………………………………. 16-20

THE SETTLEMENT

The settlement with Cendant ………………………………………… 21-22

The settlement with Ernst & Young ……………………………….. 23

THE BREAKUP ………………………………………………………………… 24

CONCLUSION ………………………………………………………………….. 25

RECOMMENDATION ………………………………………………………….. 26

BIBLIOGRAPHY ……………………………………………………………….. 27

APPENDIX ……………………………………………………………………… 28-30

1


ACKNOWLEDGEMENT

The researcher wish to acknowledge with gratitude the followings:

• To Dr. Roderick M. Rupido, Dean of College of Economics, Management

and Development Studies, instructor, for his lecture given about technical writing

that helps a lot to this research.

• To Mrs. Ludivinia Victorino, Department of Accountancy Chairperson who

given the task to this kind of research. And guide as in making this paper.

• To my parents who gave moral and financial support for doing this paper.

• To my friends and classmates

• To other sources

• And lastly to God Almighty who gives me guidance, strength and courage

to finish this paper.

-RESEARCHER

2


INTRODUCTION

This research is about CENDANT CORPORATION accounting

irregularities. Cendant Corporation was a New York-based provider of business

and consumers services, primarily within the real state and travel industries. In

2005 and 2006, Cendant broke up and spun off or sold its constituent business.

Although the company was base in New York City, the majority Cendant’s

headquarters employees were located in Parsippany-Troy Hills, New Jersey. The

last CEO of Cendant was Henry Silverman.

CENDANT CORPORATION was a product of Hospitality Franchise

Systems (HFS) and CUC (Comp-U-Card) International Corporation, merge which

was formed in December 1997.

Accounting irregularities involve inflating of company’s operating income.

The scheme was driven by senior management’s determination that CUC would

always meet the earnings expectation of Wall Street Analysts and fueled by

disregard for any obligation that the earnings reported needed to be “real”.

3


SUMMARY

On May 27, 1997, the board of directors of HFS, Inc. and CUC

International INC. approved a merger agreement that formed Cendant Corp., a

conglomerate the specialized in travel and shopping-club memberships and

internet marketing. Its divisions include Avis rental cars; the Howard Johnson,

Days Inn, and Ramada Hotel chains. The combination was billed as a merger of

equals. Henry Silverman, CEO of HFS, Inc., was selected as Cendant’s

president and CEO, while Walter Forbes, CEO of CUC International Inc., was

selected as the company’s Chairman of the board.

The merger was finalized in December, and Cendant's stock started

trading on December 17, 1997, closing that day at $32.62. Following the merger,

the company enjoyed immediate success and on April 6, 1998, its share price

rose to a high of $41.69. The company was in the midst of many acquisitions,

including the recently negotiated stock-and-cash acquisition of American Bankers

Insurance Group. Unfortunately, the company was not progressing as well as the

market believed. On April 9, 1998, the company announced that three former

CUC executives were leaving the company, including Cosmo Corigliano, CUC's

chief financial officer, and Amy Lipton, CUC's general counsel.

4


During 1995, 1996, and 1997 the management of CUC booked phoney

revenues in order to meet Wall Street’s expectations for quarterly earnings. The

falsified revenues totaled about $30 million in 1995, $87 million in 1996, and

$176 million during 1997.

Each year management recorded these fictitious revenues and increased

accounts receivable, the reversed the entries in the fourth quarter to prevent

auditors from finding them. To conceal this, they then booked revenue that

should have been taken later and utilized financial reserves that were set up to

cover cancellations for CUC’s membership clubs in discount travel, shopping,

and dining. At the end of 1996, the company also began dipping into reserves

intended to cover acquisition charges in order to boost revenue. Credit card

rejections were sometimes recorded late, inappropriate depreciation of certain

assets, delayed recognition of insurance claims and accounting that didn’t meet

generally accepted accounting principles (GAAP).

On April 15, 1998, Cendant released a shocking message after the

markets had closed for the day. Company officials had discovered potential

accounting irregularities in its core membership-club operations that will require it

to reduce reported 1997 operating income by $10 million or more and that it will

hurt this year’s earnings. The primary issue at hand was the method employed

by the CUC unit in recognizing revenue in its club-membership sales. It was

discovered that too much of the revenue was booked up front, while the

recording of the expenses associated with the memberships was deferred until

future periods. The following day, Cendant’s stock price plunged from $36.00 to

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$19.06 as an astounding 108 million shares traded hands. The average trading

volume for the Cendant had been about 4 million shares per day.

The following day its stock lost nearly $15 billion in market value and 8

lawsuits were filed by shareholders who claimed that the company made

misleading financial statements. Twenty-six shareholders lawsuits would

eventually be filed in all. CEO Henry Silverman was also affected by this drop as

his options lost $370 million in value during 1998, a record among CEO’s for the

year.

On July 14, 1998, the company sent a second shocking announcement to

the market: to meet Wall Street earnings expectations, CUC had recorded

nonexistent revenue of $300 million over a three-year period. The auditor of CUC

Ernst & Young LLP committed myriad violations of Generally Accepted

Accounting Principles, involving hundreds of millions of dollars of revenue and

income. They issued unqualified audit opinions for the period involved. After

announcing the expanded losses involved in the investigation, Cendant's stock

price dropped to $15.69, a 52-week low. Subsequently, on July 29, 1998,

mounting pressure from irate investors forced Walter Forbes to resign as

Cendant's Chairman, along with ten other members of Cendant's Board of

Directors formerly associated with CUC International Inc. Mr. Forbes received

severance pay of $47.5 million, and Mr. Silverman was elected to succeed him

as the company's new Chairman.

Over the next few months, many factors forced the stock price even

Lower. First, the SEC had instituted its own investigation into the company's

accounting policies. The strict requirements mandated by the SEC from its

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investigation forced the company to downgrade its projected earnings for 1998.

Second, as the stock price continued to decline, it became apparent that the

company's planned acquisitions would be difficult to complete. Eventually,

Cendant called off its planned acquisitions of Providian Auto & Home Insurance

Co. and American Bankers Insurance Group, Inc. Third, the allegations of fraud

created many lawsuits against the company. An investigation by Arthur Andersen

LLP focused the responsibility for the fraud on Walter Forbes and the other

dismissed CUC employees. Finally, the overall market experienced a decline in

the third quarter of 1998. The Dow Jones Industrial Average fell from its 1998

high of 9338 on July 17th to its low for the year of 7539 on August 31st (a 19

percent decrease in less than two months). In September 1998, Cendant's stock

price had impounded the aggregate effect of these factors and was trading in the

range of $10 to $14 per share.

The magnitude of the financial statement fraud at CUC and Cendant was

confirmed when Cendant filed its restated financial statements with the SEC on

September 29, 1998, which disclosed that, during the Class period, Cendant had

overstated income from continuing operations before income from continuing

operations before income taxes by approximately 24% and overstated earnings

per share by 130%.

7


COMPANY PROFILE

HFS Incorporated ("HFS") was a Delaware corporation that had its

headquarters in Parsippany, New Jersey, and was principally a controller of

franchise brand names in the hotel, real estate brokerage, and car rental

businesses. Its securities were registered pursuant to Section 12(b) of the

Exchange Act and traded on the New York Stock Exchange ("NYSE").

CUC INTERNATIONAL INC.was a Delaware corporation that had its

headquarters in Stamford, Connecticut, and was principally engaged in

membership-based consumer services, such as auto, dining, shopping, and

travel "clubs." CUC's securities also were registered pursuant to Section 12(b)

and traded on the NYSE.

Cendant Corporation, a Delaware corporation with its headquarters in New

York City, was created through the December 17, 1997, merger of HFS and

CUC. Cendant provides 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. For corporate

law purposes, Cendant is CUC. Pursuant to the Agreement and Plan of Merger

between CUC and HFS, on December 17, 1997, HFS was merged with and into

8


CUC, with CUC continuing as the surviving corporation and changing its name to

Cendant Corporation.

THE OFFICERS INVOLVE

A. Walter A. Forbes

-the former Chairman of Cendant Corporation

Forbes orchestrated an earnings management scheme at CUC

International Inc. (CUC), a corporate predecessor of Cendant, and,

subsequently, at Cendant itself. O over a twelve-year period Forbes directed a

scheme that improperly inflated the company's quarterly and annual financial

results, and that for the period 1995 to 1997, CUC's operating income was

improperly inflated by an aggregate amount exceeding $500 million. When the

fraud was disclosed in 1998, Cendant's common stock dropped dramatically,

resulting in defrauded investors losing billions of dollars.

Forbes was convicted in a related federal criminal prosecution of conspiracy to

commit securities fraud and making false filings with the Commission. In 2007,

Forbes was sentenced to 151 months in prison and ordered to pay criminal

restitution of $3.275 billion.

B. ERIK E. SHELTON

- The former Vice Chairman of Cendant Corporation

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Shelton helped orchestrate an earnings management scheme at CUC

International Inc. Shelton was convicted in a related federal criminal prosecution

of conspiracy, securities fraud, mail fraud, wire fraud, and making false filings

with the Commission. In 2005, Shelton was sentenced to 120 months in prison

and ordered to pay criminal restitution of $3.275 billion.

C. COSMO CORIGLIANO, CPA

Corigliano, age 44, is and has been a certified public accountant licensed

to practice in the State of Connecticut. He served as Controller of CUC

International Inc. ("CUC") from 1983 to 1995 and as its Chief Financial Officer

from 1995 until the December 1997 merger of CUC and HFS Incorporated

("HFS"), which formed Cendant Corporation ("Cendant"). After the merger, he

was an officer of Cendant Membership Services, the post-merger name for the

former CUC business units, until his resignation from Cendant in April 1998.

D. ANNE M. PEMBER

Pember, the former CUC Controller, was the CUC officer most responsible

for implementing directives received from Corigliano in furtherance of the fraud.

Pember was responsible for implementing directives that inflated Cendant's

annual income by more than $100 million, primarily through improper use of the

company's reserves. Pember, by her 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. The Securities and Exchange Commission seeks an injunction

10


enjoining Pember from future violations of those provisions, disgorgement of her

ill-gotten gains (plus prejudgment interest thereon), payment of a civil money

penalty, and an order permanently barring her from acting as an officer or

director of a public company.

E. PAUL HIZNAY, CPA

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, in connection with actions that he took at the direction of his superiors at

CUC. The SEC alleges that Hiznay made unsupported journal entries that

Pember had directed. Simultaneous with the institution of the administrative

proceeding, and without admitting or denying the findings contained therein,

Hiznay consented to the issuance of the Commission Order, which orders him to

cease and desist from future violations of the provisions.

F. MARY SCATTLER POLVERARI, CPA

Mary Sattler Polverari, C.P.A., age 29, was hired as Supervisor of

Financial Reporting at CUC International Inc. ("CUC") in December 1995 and

worked in the company's financial reporting operations at corporate headquarters

in Stamford, Connecticut. In the Fall of 1997, Polverari was promoted to Manager

of Financial Reporting. Polverari continued to hold that title after CUC became

Cendant Corporation ("Cendant") in December 1997. Polverari is licensed as a

certified public accountant in New York and resides in Brewster, New York.

11


The SEC found that Mary Sattler Polverari, a former CUC Supervisor of Financial

Reporting, violated the corporate record-keeping provisions of the federal

securities laws, and aided and abetted violations of the antifraud, periodic

reporting, and corporate record-keeping provisions, in connection with actions

that she took in furtherance of the fraud. The Commission alleges that Polverari,

at the direction of Sabatino and Kearney, regularly and knowingly made

unsupported alterations to CUC's quarterly financial results. Simultaneous with

the institution of the administrative proceeding, and without admitting or denying

the findings contained therein, Polverari consented to the issuance of the

Commission Order, which orders Polverari to cease and desist from future

violations of the provisions and bars her from practicing before the Commission

as an accountant, with the right to reapply after three years.

G. STEVEN SPEAKS, CPA

Steven Speaks, C.P.A., age 37, was an employee of Ideon Group, Inc. at

the time that it was acquired by CUC International Inc. ("CUC") in August 1996.

In early 1997, Speaks moved to Trumbull, Connecticut, to work in the accounting

operations at CUC's largest division, the Comp-U-Card division, and, in June

1997, Speaks became controller of Comp-U-Card. In December 1997, CUC

became Cendant Corporation ("Cendant"). Speaks is licensed as a certified

public accountant in North Dakota and resides in Trumbull, Connecticut.

Speaks violated, or aided and abetted violations, of the antifraud, periodic

reporting, and corporate record-keeping provisions of the federal securities laws

and seeking an order requiring Speaks to pay a civil money penalty. Without

12


admitting or denying the Commission's allegations, Speaks has consented to the

entry of a Final Judgment that would order Speaks to pay a civil money penalty

of $25,000

H. CASPER SABATINO

The SEC alleges Sabatino, a former CUC Vice President of Accounting

and Financial Reporting, implemented directives from Corigliano in furtherance of

the fraud. Among other things, the Commission's complaint alleges that Sabatino

was the CUC officer most responsible for directing lower-level CUC financial

reporting managers to make Corigliano's alterations to the company's quarterly

financial results. The complaint alleges 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 has

consented to entry of a Final Judgment that would enjoin him from future

violations of those provisions and permanently bar him from acting as an officer

or director of a public company.

I. KEVIN T. KEARNEY

The SEC alleges that Kearney, a former CUC Director of Financial

Reporting, also instructed lower-level CUC financial reporting managers to carry

out directives received from Corigliano in furtherance of the fraud. Among other

things, the Commission alleges that Kearney was regularly present when

Corigliano would calculate unsupported alterations to CUC's quarterly results and

that, while he was part of the CUC financial reporting operations, Kearney

13


supervised the lower-level managers who actually entered Corigliano's quarterly

alterations. The complaint alleges that Kearney also profited from his own wrong-

doing, selling CUC and Cendant stock at prices inflated by the fraud he had

knowingly assisted. The Commission's complaint alleges that Kearney, by his

actions in furtherance of the fraud, violated, or aided and abetted violations of,

the antifraud, periodic reporting, corporate record-keeping, and lying to auditors

provisions of the federal securities laws. Kearney has consented to entry of a

Final Judgment that would enjoin him from future violations of those provisions,

order him to pay disgorgement of $32,443 in ill-gotten gains (plus prejudgment

interest of $8,234), and order him to pay a civil money penalty of $35,000.

J. KENNETH WILCHFORT AND MARC RABINOWITZ

- They are partners at Ernst & Young LLP.

Kenneth Wilchfort, CPA, age 50, is a partner at E&Y. Until approximately 1999,

Wilchfort worked in the Assurance and Advisory Business Services ("AABS")

practice of E&Y's Stamford, Connecticut office. Wilchfort served as the CUC

audit engagement partner from 1990 through the third quarter of 1996.

Thereafter, as mandated by rotation requirements set by the SEC Practice

Section of the American Institute of Certified Public Accountants, Wilchfort

ceased serving as audit engagement partner. He continued to serve CUC and

Cendant as "Senior Advisory Partner."

Marc Rabinowitz, CPA, age 46, is a partner at E&Y. Until approximately 1998,

Rabinowitz worked in the AABS practice of E&Y's Stamford, Connecticut office.

14


Rabinowitz was the audit engagement partner for CUC and the former CUC

portion of Cendant from the third quarter of 1996 until April 1998.

- Wilchfort and Rabinowitz failed to detect the fraud taken by CUC

and Cendant Corp. in inflating their operating income. Partners relies only to the

false management representation without inspecting their general ledger and

other evidences and issued audit reports containing unqualified audit opinion and

conducted quarterly reviews of the company’s financial statements.

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DISCUSSION

CENDANT CORPORATION involves a massive fraudulent financial

reporting scheme that caused dramatic investor losses. For more than twelve

years, until its exposure in 1998, certain members of CUC's senior and middle

management devised and operated a systemic, systematic scheme to inflate

operating income at CUC. The scheme was driven by senior management's

determination that CUC would always meet the earnings expectations of Wall

Street analysts and fueled by disregard for any obligation that the earnings

reported needed to be "real."

CUC senior management overseeing the scheme maintained an annual

schedule listing revenue and operating income for each of the company's

divisions for its current fiscal year and coming fiscal year and setting forth the so-

called "opportunities" or means available for inflating the company's operating

income during the coming year. At the beginning of each fiscal year,

management decided which of these opportunities to use for that fiscal year and

the amount needed from each such opportunity. Accordingly, the schedule

served as management's "cheat sheet" for any given year.

CUC management utilized four principal categories of opportunities to

inflate the company's income and earnings. Two of those categories involved the

16


company's sales of membership products. First, management manipulated

recognition of the company's membership sales revenues. Second, management

improperly utilized two liability accounts related to membership sales,

consistently maintaining inadequate balances in the accounts and on occasion

reversing the accounts directly into operating income. To hide the inadequate

balances, management periodically kept certain membership sales transactions

off-books.

The remaining two categories of opportunities involved the company's

merger and purchase reserves. In what was the most significant category

quantitatively, CUC management intentionally overstated merger and purchase

reserves and subsequently reversed those reserves directly into operating

expenses and revenues. Finally, management improperly wrote off assets --

including assets that were unimpaired -- and improperly charged the write-offs

against the company's merger reserves. The improper write-offs inflated

operating income in various ways. CUC management directed some of the write-

offs to improper reporting periods, thereby manipulating results by avoiding

charges in the period in which the write-offs should have been taken. In some

instances, write-offs should have been taken against operating income but

instead were improperly charged against merger reserves. In other cases, the

assets were not impaired, and by taking the write-offs management avoided

continuing depreciation or amortization costs. Together, the four categories of

opportunities added an aggregate of more than $500 million to the company's

pre-tax operating income during the fiscal years ended January 31, 1996;

17


January 31, 1997; and December 31, 1997. Of that amount, more than half --

approximately $260 million -- was added to the fiscal year ended December 31,

1997.

CUC senior management supervised the scheme over the course of each

fiscal year. Beginning in at least 1988, management regularly made certain

aggregate changes to CUC's reported quarterly financial results. Accordingly, at

the end of each of the company's first three fiscal quarters, senior managers took

the company's actual results for the quarter and compared them with the

quarterly expectations of analysts. The senior managers then directed mid-level

financial reporting managers at CUC corporate headquarters to add whatever

amounts were needed in order to bring CUC's quarterly income up to analysts'

expectations. Thus, for each of the first three quarters of a CUC fiscal year, the

managers artificially inflated revenues and decreased operating expenses. In

conjunction with these income statement changes, the managers also

cosmetically altered certain CUC balance sheet items.

The fraudulent and artificial income statement and balance sheet

alterations were simply inserted quarterly into a spreadsheet kept at CUC's

financial reporting operations at Stamford, Connecticut. The quarterly changes

were made solely as top-side adjustments in the spreadsheet -- that is, no journal

entries were made, the company's general ledger was not altered, and the

changes were not carried down to the books of the company's divisions. The

spreadsheet was then used to generate consolidated financial statements for the

company, and those consolidated financial statements were used for the

18


company's press releases and quarterly reports. Accordingly, the company's

quarterly reports filed with the Commission and released to investors did not

accurately reflect the company's books and records. Moreover, quarter by

quarter, the discrepancy between the company's quarterly reports and its books

and records grew wider and wider. For example, the quarterly top-side alterations

aggregated $31 million for the company's fiscal year ended January 31, 1996; an

additional $87 million for its fiscal year ended January 31, 1997; and another

$176 million for its fiscal year ended December 31, 1997.

At the end of each fiscal year, the CUC managers implementing the

scheme utilized the previously targeted opportunities to inflate the company's

annual results as recorded on its books and records, so that the books and

records would be consistent with the financial results already released and so

that CUC's reported annual income would, in fact, meet the expectations of Wall

Street analysts. As the scheme progressed over the course of several years,

larger and larger opportunities were required. Eventually, only massive merger-

related opportunities could sustain the scheme, and the need for such

opportunities ultimately led CUC to seek a merger with HFS.

In furtherance of their scheme, CUC managers falsified the company's

books and records and failed to implement a system of internal accounting

controls. In general, the managers simply created whatever entries were needed

to accomplish their goals, regardless of whether the entries were in any way

grounded in the fiscal or business realities of CUC. Moreover, to conceal the

scheme, at year-end they repeatedly and regularly used unsupported post-

19


closing journal entries carrying effective dates spread retroactively over prior

months. At times, an unsupported entry would be broken into smaller component

entries to make the adjustments less noticeable. Other entries were intentionally

created in odd amounts to hide the fact that the entries were completely fictitious.

When merger reserves were initially established, amounts were routinely and

intentionally overstated. At times, reversals of merger reserves were designated

as revenues. As noted, the quarterly consolidated financial statements were

largely fictional. Membership sales cancellations and rejects were intentionally

kept off-books for extended periods of time. At times, intercompany transactions

were used to hide the offsets to specific entries. The scheme was designed to

inflate CUC's income and earnings, and it did just that: as a result of the scheme,

CUC filed periodic reports and other filings that overstated income, earnings, and

certain of its assets. In sum, those reports and filings misrepresented the

company's true financial condition and results of operations.

20


THE SETTLEMENT

The Settlement with Cendant

By December 1999, announce on behalf of the lead plaintiffs the landmark $2.85

billion settlement with Cendant that far surpassed the recoveries in any other

securities law class ac ion case in history. Until the settlements reached in the

WorldCom case in 2005, this stood as the largest recovery in a securities class

action case, by far, and clearly set the standard in the field. In addition to the

cash payment by Cendant, which was backed by a letter of credit that the

company secured to protect the class, the Cendant settlement included two other

very important features:

First, the settlement provided that in the event Cendant or the former HFS

officers and directors were successful in obtaining a net recovery in their

continuing litigation against E&Y, the Class would receive one-half of any such

net recovery. As it turned out, that litigation lasted another seven years – until the

end of 2007 – when Cendant and E&Y settled their claims against each other in

exchange for a payment by E&Y to Cendant of nearly $300 million. Based on the

provision in the Cendant settlement agreement and certain further litigation and a

21


court order, in December 2008, the class received another $132 million. This

brought the total recovered from the Cendant settlement to $2.982 billion.

Second, Cendant was required to institute significant corporate governance

changes that were far-reaching and unprecedented in securities class action

litigation. Indeed, these changes included many of the corporate governance

structural changes that would later be included within the Sarbanes-Oxley Act of

2002. They included the following:

The board’s audit, nominating and compensation committees would be

comprised entirely of independent directors (according to stringent

definitions, endorsed by the institutional investment community, of what

constituted an independent director);

The majority of the board would be independent within two years following

final approval of the settlement;

Cendant would take the steps necessary to provide that, subject to

amendment of the certificate of incorporation de-classifying the board of

directors by vote of the required super-majority of shareholders, all

directors would be elected annually; and

No employee stock option could be "re-priced" following its grant without an

affirmative vote of shareholders, except when such re-pricings were

necessary to take into account corporate transactions such as stock

dividends, stock splits, recapitalization, a merger or distributions.

22


The Settlement with Ernst & Young

Ten days after reaching agreement on the Cendant settlement, with

analiyzed negotiation of an equally impressive settlement with Ernst & Young,

the accounting firm that audited CUC’s financial statements. On December 17,

1999, announced that E&Y had also agreed to settle the claims of the class for

$335 million. This recovery was and remains today as the largest amount ever

paid by an accounting firm in securities class action case. The recovery from

E&Y was significant because it held an outside auditing firm responsible in cases

of corporate accounting fraud. The claims against E&Ywere based on E&Y’s

“clean” audit and review opinions for three sets of annual financial statements,

and seven quarterly financial statements, between 1995 and 1997, but it had

failed to review quarterly reporting packages by CUC subsidiaries; it did not

require adequate documentation for the company’s mergers reserves and top-

side adjustments; and failed to review the company’s general ledgers.

23


THE BREAKUP

On October 23, 2005, Cendant Corporation announced its decision to split

into four separate companies, citing a necessity to diversify in appealing to

stockholders and in an attempt to increase the value of the post-split up

company. These four categories include "Real Estate,Travel

Distribution, Hospitality and Vehicle Rental Companies.

Cendant originally decided to spin off its Travel Distribution division as a

separate company called Travelport, but on June 30, 2006, Cendant announced

the sale of Travelport to an affiliate of the privately held Blackstone Group for

$4.3 Billion. This sale closed on August 23, 2006.

During the fall of 2005 Progeny Marketing Innovations and Trilegiant were

sold to private equity group Apollo Management. They changed their name in

January 2006 to Affinion Group.

On July 31 of 2006, both the Cendant Real Estate division as well as the

Cendant Hospitality division were spun off and became separate companies

under the names Realogy and Wyndham Worldwide, respectively. Realogy was

subsequently bought by Apollo.

The Cendant Car Rental Group, which owns Avis, Budget Rent A

Car and Budget Truck Rental rental companies, became the sole remaining

24

http://en.wikipedia.org/wiki/Budget_Truck_Rental

http://en.wikipedia.org/wiki/Budget_Rent_A_Car

http://en.wikipedia.org/wiki/Budget_Rent_A_Car

http://en.wikipedia.org/wiki/Avis_Rent_A_Car_System_Inc.

http://en.wikipedia.org/wiki/Wyndham_Worldwide

http://en.wikipedia.org/wiki/Realogy

http://en.wikipedia.org/wiki/Affinion_Group

http://en.wikipedia.org/wiki/Apollo_Management

http://en.wikipedia.org/wiki/Blackstone_Group

http://en.wikipedia.org/wiki/Travelport

http://en.wikipedia.org/wiki/Avis_Budget_Group

http://en.wikipedia.org/wiki/Wyndham_Worldwide



http://en.wikipedia.org/wiki/Realogy


company under the Cendant name. The company changed its name to Avis

Budget Group and the Cendant name has been completely dissolved.

CONCLUSION

As to meet what Wall Street Analysts expect, Cendant Corporation suffers

from millions of losses.

CUC or Cendant Corporation forced to involve in a massive fraudulent

financial reporting schemed that caused dramatic investors losses.

The disclosure of Cendant’s accounting irregularities in April of 1998

caused the collapse of the stock by 46.5 percent in a single day. This decline

represented a decrease in Cendant's market capitalization (price per share times

the number of shares outstanding) of approximately $14 billion. The investors

have lost more than $100 billion because of financial fraud and the resulting

earnings restatements since 1995.

Abusive earnings management was the culture firm implemented by

Cendant Corporation causes this company now not existing.

25




RECOMMENDATION

Financial statement fraud or fraudulent earnings management has

become increasing issue in the world of business. The responsibility for detecting

financial statement fraud is widely attributed to a company's external auditors.

However, the auditing profession has been very circumspect in defining its role in

fraud detection. Like what happen in Ernst & Young LLP, the responsible for

auditing the financial statement of Cendant Corporation. They failed to review the

general ledgers of the company that’s why Cendant continues their scheme.

External auditors shall take this consideration in auditing on financial

statement of any company:

• Recounts of inventory and unannounced visits to locations.

• Interviews of financial and non-financial client personnel in different

locations.

• Requests for written confirmations from client employees regarding

matters about which they have made representations to the auditors.

• Tests of accounts not normally performed annually.

• Tests of accounts traditionally or frequently deemed "low risk."

26


BIBLIOGRAPHY

http://goliath.ecnext.com/coms2/gi_0199-2610886/The-accounting-profession-

and-financial.html

http://en.wikipedia.org/wiki/Cendant

http://www.barrack.com/Case-Study-Cendant.html

http://sec.gov/search/search.htm

http://classactionworld.com/Cendant+Corporation+Litigation/filed/94.html

http://caselaw.findlaw.com/us-3rd-circuit/1040566.html

http://www.referenceforbusiness.com/history2/94/Cendant-Corporation.html

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APPENDIX

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29


WALTER A. FORBES

FORMER CHAIRMAN OF Cendant Corporation

HENRY SILVERMAN

CEO of Cendant Corporation

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the cendant corporation accounting scandal 2

Documents

federal securities

wall street

audit engagement

civil money

certified

pay criminal

chief financial

earnings reported