Cendant Corp.

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Cendant, Inc.
Isis Hill Kacy Hoover Anita Marshall David
Schmill Mike Whitmore
2
CUC International
Sold memberships in discount shopping, travel,
and entertainment clubs

• Walter ForbesCEO, The Tooth Fairy
• Kirk SheltonPresident
• Cosmo CoriglianoCFO
• Anne PemberSenior Vice President and Controller
• Casper SabatinoVP of ACCT and Financial
  Reporting
• Steven SpeaksController, Comp-U-Card Division

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HFS, Inc.
Franchiser with rights to multiple hotels and
other businesses

• Henry SilvermanCEO

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Cendant Corp.
A provider of travel and residential real estate
services
Silverman became Chairman, President, and CEO of
Cendant Corp.
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What Happened?
Cendant Stock Prices in 1998
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The Facts

• January 1997 Merger discussions begin
• - April 1997 A merger of equals
• - December 1997 Merger completed
• - Cendant stock selling for 41 per share
• Show me the Numbers
• January-February 1998
• - Silverman presses for details
• March 1998
• - Revenue adjustments come to light

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The Facts

• Eight days later...extent of fraud disclosed
• - Speaks and Sabatino speak out
• - 17 of the companys 22 business units
• - More than 20 CUC controllers involved
• - Instructed to commit fraud by Corigliano
  and Pember
• 511 in bogus pretax income over 3 years
• - Inflated earnings by more than 1/3
• - In 1997...61 of net income made up

8
The Facts

• Ernst Young assure Silverman
• - Restatement not required
• Silverman furious......heads roll
• - Shelton and Corigliano have to go
• - April 1st entire Forbes mgmt have to go
• - Cendant stock selling for 19 per share
• Silverman and Forbes in power squabble
• - 47.5 million compromise

9
The Facts

• Silverman... public disclosure needed
• - Hires Willkie Farr Gallagher law firm
• - Hires Arthur Andersen...forensic accountants
• November 1998
• - Cendant stock selling for 10 per share
• Late 1999
• - Cendant settles shareholders suits for 2.8
  billion
• - Ernst Young agrees to pay 335 million

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The Facts

• Early 2000...efforts to boost stock price
• - Cendant sells several noncore business units
• - Cendant buys back 3 billion of stock
• June 2000...executives plead guilty to fraud
• - Corigliano, Pember and Sabatino
• February 2001...Criminal fraud indictments
• - Walter Forbes and E. Kirk Shelton
• September 10, 2001
• - Cendant stock selling for 17.76 per share

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Factors Leading to the Fraud

• CUC Company Culture
• A history of accounting irregularities
• Individual divisions left to own devices
• No long-term planning
• Walter Forbes viewed himself as a visionary and
  left details to others. His staff referred to
  him as The Tooth Fairy

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Factors Leading to the Fraud
Pressure to Perform
They looked at the numbers that were internally
generated, and compared them to the Street
expectations. To the extent there was a gap,
they just fictitiously recorded revenues and
increased accounts receivable.
Cendant CFO Michael Monaco
Greed? Walter Forbes sold 30 million of CUC
stock between 1993 and 1997
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Factors Leading to the Fraud

• Auditor/CUC Familiarity
• Several CUC executives were former EY employees
• Close ties between CUC and EY executives
• Professional skepticism was not exercised

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Leading Up To Detection

• Beginning 1998
• CUC Chief Operating Officer Kirk Shelton
  resistant to give hard numbers to HFS
• Outside auditors denied access to select
  financial data

15
Unknown Fraud

• Question Did Walter Forbes know of the fraud?
• Given Silvermans hands-on management style,
  there was simply no way a fraud that big was
  going to escape (Silvermans) notice one he was
  running the combine companies
• A Merger Made In Hell, Fortune Nov 9 1998

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Leading Up To Detection

• February 1998
• Walter Forbes asked Silverman to
• Maintain roles of CUCs CFO Cosmo Corigliano and
  Controller Anne Pember
• Have CUC division controllers report to
  Corigliano and Pember

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Leading Up To Detection

• Late February
• CUC January results not yet reported to Cendant
• Silverman had made it clear that he expected
  prompt, detailed monthly financial reports
• 10-K filing deadline approaching
• Corigliano Pember cut out of reporting process
• CUC controllers now reported to S. Forbes,
  Cendant CFO

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The Ball Drops

• Friday, Mar 6 1998
• Stamford, CT meeting
• Kirk Shelton asks Scott Forbes to do some
  creative accounting
• Occurred in 1997 as well
• Pember Corigliano fired, Walter Forbes asked to
  resign

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The Ball Drops

• Thursday, Apr 9 1998
• Cendant budget meeting Steven Speaks Casper
  Sabatino reveal widespread fraud at CUC
• Inflated revenues through fake accounting entries
  by 511 million
• Tuesday, Apr 14 1998
• Silverman and top management decide public
  disclosure is required
• Willkie Farr Gallagher hired to direct
  investigation
• Arthur Andersen hired for forensic accounting

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Fraud Prevention

• Create culture of non-tolerance
• Tone at the top
• Corporate governance structure
• Install fraud reporting procedures

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Fraud Prevention

• Reduce Fraud Opportunities
• Create a more tightly run organization
• Screen the auditors

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Fraud Prevention
Faking the numbers was my job, and my superiors
were encouraging me. Cosmo Corigliano
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Works Cited
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Works Cited