Cendant Corporation
Henry Silverman
Major Case 4
Rashid Hijazi
ACCT530
Professor Michael Abner
Contents
 Company Overview
 Ethical Issues
 Questions
 Optional Question
 Conclusion
 References
Company Overview
 Henry Silverman, a business executive and private
equity investor created Hospitality Franchise
Systems (HFS) as a vehicle to acquire a number
of hotel franchises in the early 1990s. Among
Silverman’s purchases were such brands as
Ramada and Howard Johnson's as well as Days
Inn, which he was able to buy for $290 million (less
than half what he had sold it for) after the company
had filed for bankruptcy in 1991. Silverman quickly
took Hospitality Franchise Systems public in a
1992 IPO.
Company Overview
 Henry R. Silverman is an American entrepreneur
and private equity investor. Silverman is best known for
his role in building Cendant Corporation into a
multibillion dollar business services company that
provided car rentals, travel reservation services as well
as real estate brokerage services and was also the largest
franchisor of hotels globally.
 Among the brands that Silverman controlled included
hotels and motels such as AmeriHost INN, Days
Inn, Howard Johnson's, Ramada, Super 8 and
Travelodge.
Company Overview
 Building on his experience with Days Inn, while at
Blackstone Silverman created Hospitality Franchise
Systems (HFS) which would acquire a number of
hotel franchises. Among Silverman’s purchases were
such brands as Ramada and Howard Johnson's as
well as Days Inn, which he was able to buy for $290
million (almost half what he had sold it for) after the
company had filed for bankruptcy in 1991. Hospitality
Franchise Systems went public in a 1992 IPO.
Company Overview
 Silverman’s compensation was the subject of scrutiny in
2004. In 2002, on the back of strong performance at
Cendant, Silverman signed a 10-year contract that
provided for medical benefits, office space as well as
travel perks including a corporate airplane and a
company car and driver. Of greater attention was the
compensation Silverman received in 2003. Silverman’s
2003 compensation was estimated at $60 million, which
included $14 million in cash salary and bonus, $37
million in stock options and $4.6 million paid as
premiums on a company funded life insurance policy.
Company Overview
 Cendant Corporation was a New York-based provider
of business and consumer services, primarily within the
real estate and travel industries. In 2005 and 2006,
Cendant broke up and spun off or sold its constituent
businesses. Although the company was based in New
York City, the majority of Cendant's headquarters
employees were located in Parsippany-Troy Hills, New
Jersey.
 The last CEO of Cendant was Henry Silverman.
 In early 2005, Cendant purchased ebookers for just
under £190 million. Later in the year, Cendant acquired
London based Gullivers Travel Associates.
Ethical Issues
 The SEC expects a public company to report truthful
information in all of its filings with the Commission.
The accounting profession is harmed when an audit does
not obtain sufficient, competent evidence, judged with
professional skepticism.
 Objectivity requires that the company should approach
its decision about the proper revenue recognition
procedure with fair-mindedness and without partially to
one set of stakeholders.
Ethical Issues
Using rights theory, it is not right to mislead the
investors by making it look as though the company is
doing better than it really is. Any attempt to intentionally
misstate the financial statements violates the
categorical imperative.
Using justice theory, stakeholder interests are not fairly
represented because the perceived interests of the
management are given priority over the interest of all
other stakeholders.
Ethical Issues
 Rule-utilitarianism requires that the correct rule should be
followed. Act-utilitarianism requires that the act that creates the
greatest good for the greatest number of stakeholders should be
selected.
 None of the stakeholders benefit from an action that misstates
net income. Using virtue theory, honesty requires that the
statements should be truthful and recognize revenue using
generally accepted accounting principles.
 Trustworthiness means that the accountants should not violate
the investors’ faith that the statements are accurate and reliable.
Questions
Briefly summarize the accounting techniques used by
Cendant to manipulate financial results. Categorize each
technique into one of Schilit’s financial shenanigans.
Cendant used aggressive accounting to shift current marketing
expenses to a later period by capitalizing the costs; this is
shenanigan number 4. Cendant also shifted future expenses to the
current period and later released reserves into income. When
Cendant made acquisition, it took large restricting charges to create
bogus income; this is shenanigan number 7. Then in subsequent
period, Cendant released these reserves into income; this is
shenanigan number 5.
Questions
Describe the failings of E&Y with respect to conducting an
audit in accordance with GAAS. Include in your discussion
any violation of the AICPA Code of Professional Conduct.
 Cendant made materially false statements to E&Y to mislead the
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auditors into believing the Company’s financial statements conformed
to GAAP.
The statements concerned the creation and utilization of merger-related
reserves
The auditors failed to recognize evidence that the company's
establishment and use of the Cendant Reserve did not conform to
GAAP.
While the component categories changed over the different drafts, the
total amount of the reserve never changed materially
Despite this evidence, the auditors did not obtain adequate analyses,
documentation, or support for changes they observed in the various
revisions of the schedules submitted to support the establishment of
the reserves
Questions
 E&Y did not seem to meet the GAAS standards of
integrity, objectivity, independence, and supervision
of assistants of the general standards. It also did not
obtain sufficient, competent evidence, nor express an
opinion based on the evidence. The violations of the
AICPA Code of Professional Conduct were Rule 101,
Independence; 102, Integrity and Independence; 201,
General Standards; 202, Accounting Principles; 203,
Accounting Principles; and 501, Acts Discreditable.
Questions
Evaluate the actions of Cendant management with respect to
its obligations to shareholders. Did it meet those
obligations? Why or why not?
Cendant management did not meet the criteria of fiduciary duty and
did not protect the interests of all stakeholders. Additionally the
management profited from their own wrong-doing by selling the
Company’s securities at inflated prices while the fraud was
underway and undisclosed. These sales of securities brought
Cendant management millions of dollars in ill-gotten gains.
Questions
The corporate governance requirements for Cendant that were
stipulated in the class action lawsuit seem to emphasize the
need for independence of the board of directors and audit
committee. Using the corporate governance provisions in
the Sarbanes-Oxley Act and NYSE listing requirements,
identify the additional governance requirements that could
have been imposed on Cendant. What should they be
designed to accomplish?
The NYSE-listed companies adopt and disclose their corporate
governance guidelines thatcover director qualifications, responsibilities,
access to management, compensation, management succession and
annual evaluation of the board.
Questions
Additional governance criteria that could have been imposed include
adding a financial expert as one of the independent members of the audit
committee; strengthening the internal audit function by adding a director of
internal audit to management with direct reporting to the audit committee,
guidelines on executive compensation and tying to performance measures,
executive compensation reviewed by the compensation committee and
approved by the entire board. These measures are designed to protect all
stakeholders of a corporation; it directs, controls and holds management
accountable to achieve the long term strategic goals of the stakeholders.
Optional Question
The rules in accounting for merger and other restructuring
reserves were changed after the frauds at companies like
Cendant and Lucent. Research the new rules and explain
how they differ from the rules in effect at the time of the
Cendant fraud and why the rules were changed.
In the past, the pooling of interests method accounted for a business
combination as the uniting of the ownership of interests of two or more
companies by exchange of equity securities; no acquisition was
recognized as the combination was completed without disbursing
resources of the entities. The recorded assets and liabilities of the entities
were carried forward to the combined corporation at the recorded amounts.
Income of the combined corporation was the income of the entities for the
entire fiscal period in the which the combination occured and the income
for prior periods were combined and restated as income of the combined
corporation.
Conclusion
 After a pooling of interests had occurred, companies undertook
restructuring and set up reserves to write-down overstated
assets. Often the assets written off were not overstated.
 The rules were changed to the acquisition method to stop the
manipulation of reserves and goodwill under the pooling of
interests method.
 After a pooling of interests had occurred, companies undertook
restructuring and set up reserves to write-down overstated
assets. Often the assets written off were not overstated.
 The rules were changed to the acquisition method to stop the
manipulation of reserves and goodwill under the pooling of
interests method.
References
 Ethical Obligations and Decision Making in Accounting: Text
and Cases, 2nd Edition
 http://www.cendantbenefits.com/
 www.sec.gov/litigation/complaints.htm
 Cendant Corporation Litigation, 264 F3d 201 264 F.3d 201 (3rd
Cir. 2001), http://openjurist.org/264/f3d/201/in-re-cendantcorporation-litigation