Posted: February 28th, 2017
. Briefly summarize the accounting techniques used by Cendant to manipulate financial results. Categorize each technique into one of Schilit’s financial shenanigans. 2. Describe the failings of EY with respect to conducting an audit in accordance with GAAS. Include in your discussion any violations of the AICPA Code of Professional Conduct. 3. Evaluate the actions of Cendant management with respect to its obligations to shareholders. Did it meet those obligations? Why or why not? 4. 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?
Answer: Step 1 Cendant used the accounting technique of inflating sales to manipulate its earnings. There were $500 million of fraudulent sales and receivables recorded between 1995 and 1997. It had recorded $500 million of fake revenue. This inflation of revenue was done by Vice Chairman E Kirk Shelton. If we consider Schilit’s Seven Shenanigans, the Shenanigan that was used the most by Cendant was recording bogus revenue. Specifically the techniques used were decreasing reserves for uncollectible accounts even though the receivables were increasing reduced its cancellation and commission reserves when revenues were increasing, intentionally overstating merger and purchase reserves which were reversed directly into operating expenses/revenues, and it manipulated its financial report to ensure that revenues and expenses were reported at the same percentage each year. Most of Cendant’s financial manipulation was to record bogus revenue by reducing reserves or manipulating the financial statements.
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