fraud Article Summary
The Bloomberg news website posted an article on April 1, 2019 written by Jef Feeley and Anders Melin titled “Hertz Seeks $70 Million in Clawbacks Tied to Accounting Scandal”. Clawbacks are a measure made possible through the Sarbanes-Oxley Act of 2002 that allows companies to seek punishment for the executive wrongdoings. The article states that ex-CEO Mark Frissora, ex-CFO Elyse Douglas, and general counsel J. Jeffrey Zimmerman were key players in an accounting scandal five years ago resulting in a federal investigation and encouraged Hertz to restate their financial results from the previous three years with a cost of more than $200 million. Scott Sider, a former president in an American rental-car unit, and Jatindar Kaput, an ex-Controller, were also mentioned as having a part in the accounting scandal but were not listed as defendants in the lawsuit. The firm is demanding that the former executives and senior managers return incentive compensation in the amount of at least $70 million that was received during the time of the scandal.
The restatement was prompted by the misconduct and gross negligence of the senior executive officers. The allegations of misconduct and gross negligence included fraudulent behaviors such as: misstated pretax income due to accounting errors in multiple units, incorrect methods were used to determine allowances and write-offs for some receivables, subordinates were pressured to make “inappropriate accounting decisions” to compensate for the difference between actual and expected performance, and fraudulent accounting techniques to inflate income and earnings.
The defendants refused to return the incentive compensation they received because of the inaccurate accounting results and wrongful behavior which is what prompted the lawsuit being filed. Douglas and Zimmerman were sued for their failure to report the pressure tactics of Frissora and a demand for the return of severance pay is included in the lawsuit. Frissora denies the allegations stating that he is “proud of his record of integrity and transparency in business” and believe that the claims against him will be found to be incorrect.
Because of the actions of these former executives and senior managers, Hertz has agreed to pay $16 million to the Securities and Exchange Commission (SEC) to settle the claims without admitting or denying wrongdoing. Their actions have also caused the company’s stock shares to drastically decrease creating issues with investors and compromising the long-term security of the company (Feeley & Melin, 2019).
Preventive Measures
There are a variety of measures that a company can take to prevent accounting fraud. In the summarized Hertz case, the company could have audited the books regularly internally and financial statements annually externally, performed reconciliations regularly, and implemented a separation of duties to prevent the misstated pretax income due to accounting errors, identify incorrect methods being used when determining allowances and write-offs for receivables accounts, and detect fraudulent accounting techniques being used to inflate income and earnings. These measures could have helped in recognizing the accounting errors and other illegal practices when they occurred and prevented further damages. Hertz could also establish an anonymous and open reporting system that would allow employees to report when they are being pressured to make inappropriate accounting decisions or when they see something that is dishonest or unacceptable behavior. Implementing measures to prevent accounting fraud is not enough. They must be reviewed for compliance, followed from the top down, and enforced.
References
Feeley, J. & Melin, A. (2019). Bloomberg. Retrieved from https://www.bloomberg.com/news/articles/2019-04-01/hertz-seeks-70-million-in-clawbacks-tied-to-accounting-scandal
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