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Cendant Corporation was formed on May 27, 1997 with the merger agreement

between the Boards of Directors for HFS, Inc. and CUC International Inc.
Cendant Corporation was created as a conglomerate that specialized in
shopping-club memberships, Internet marketing and traveling. Its divisions
contain the Howard Johnson, Days Inn, and Ramada hotel chains; the Coldwell
Banker and Century 21 real-estate franchises; Sierra On-Line software and Avis
rental cars. It was the merger of equals- 50/50. Henry Silverman, who was
Chief Executive Officer of HFS Inc., was chosen as CEO and President of newly
formed corporation, and Walter Forbes, who was CEO of CUC International Inc.,
was chosen as the companys Chairman of the Board. The merger was finished
in December, and stock of Cendant Corp. started trading on December 17,
1997, closing that day at the level of $32.62. Immediately after the merger, the
company experienced success and on April 6, 1998 its price per share increased
to the level of $41.69. The corporation was in the process of many acquisitions,
including the negotiated acquisition of American Bankers Insurance Group. But
companys success was not long and company was not progressing and
increasing its share price as the market analysts prognosis. On April 9, 1998
the corporation announced that three former CUC executives were leaving the
corporation, including Cosmo Corigliano, CFO of CUC, and Amy Lipton, general
counsel of CUC. This is what the Wall Street Journal reported on this regard:
Rumors of changes at the top of the company had sent the stock plunging
earlier in the day. The stock closed at $37, down $2.0625, or 5.3%, in
composite trading on the New York Stock Exchange... The company tried to
reassure investors in a conference call, saying that first-quarter earnings met
or exceeded analysts expectations of 25 cents a diluted share, according to
First Call....In an interview, Mr. Silverman called the impending resignations
inevitable when large companies merge.... He added that Ms. Liptons and Mr.
Coriglianos jobs went away with the merger.
In a week, on April 15, 1998 Cendant Corp. released a message that shocked
everyone at the stock market after the markets had closed for the day.
Management of the company had found out some accounting irregularities in its
main membership-club operations that will demand it to decrease reported
1997 operating income by more then $100 million and that it will badly
influence profit of this year (1998). The key issue at the moment was in the
method utilized by the CUC unit in recognizing revenue in its club-membership
sales. It was found out that too much of the revenue was booked up for future,
while recording expenses that were associated with the memberships was
deferred until future periods. The next day, Cendant Companys stock price
lowered from close on Wednesday of $36.00 to $19.06 as an astonishing 108
million shares traded hands. Before that, for Cendant Company the average
trading volume had been about 4 million shares per day.

On July 14, 1998 the corporation released another shocking message to the
market: in order to meet earnings expectations of Wall Street, CUC had
recorded nonexistent revenue of $300 million for the period of three years.
During evaluation of the situation, Mr. Silverman said that, We merged with a
company and 50% to 60% of the earnings were without substance. It should be
called a terrible transaction...A layman would call it fraud. Ernst & Young LLP
was auditor of CUC Corporation and had issued unqualified audit opinions for
that three year period. In its defend Ernst & Young claimed, Revenue
recognition is a complex issue...accounting is an art. Accountings principles
are subject to interpretation. After announcement of the great losses
involved, stock price of Cendant Corp. decreased up to $15.69, and reached a
52-week low. Consequently, on July 29, 1998 raising pressure from irritated
investors forced Walter Forbes to leave the position of Chairman of Cendant
Corporation, along with ten other members of Board of Directors of Cendant
that were previously associated with CUC International Inc. Mr. Forbes received
compensation pay of $47.5 million, and Mr. Silverman was elected as his
successor as the new Chairman of the Corporation. During next several months,
many factors made the stock price to fall even lower. First of all, the SEC had
launched its own investigation into the accounting policies of the corporation.
The severe requirements mandated by the SEC from its investigation forced the
corporation to lower its projected earnings for 1998. Second, as the stock price
continue to fall, it became obvious that the planned acquisitions of the
company would be difficult to finish. Finally, Cendant Corporation called off its
planned acquisitions of American Bankers Insurance Group, Inc. and Providian
Auto & Home Insurance Co. Third, the fraud allegations lead to emergence of
many lawsuits against the corporation. Arthur Andersen LLP made its own
investigation and based on its results focused the responsibility for the fraud on
Walter Forbes and the other CUC employees that were dismissed. Eventually,
the overall market faced a fall in the third quarter of 1998. The Dow Jones
Industrial Average decreased from its 1998 high of 9338 on July 17th to its low
for the year of 7539 on August 31st (a fall of 19 percent in less than two
months). In September 1998, stock price of Cendant Corporation had absorbed
the compound effect of these factors and was trading in the range of $10 to
$14 per share. Like many publicly traded companies, Cendant Corporation had
a committee responsible for compensation, which was composed of four
directors of the corporation, to supervise compensation policies of the
company. The compensation packages of executives and major employees
included three main components: salary, bonus and stock options. Main
emphasis was given to compensation based on equity or stock options. The
compensation committee considered that it was essential to make interests of
management equal to those of shareholders. Stock options were issued with an
exercise price that was equal to the stock price of the corporation on the
issuance date. They were created to provide a significant payoff to employees

when stock price of Cendant Company rose above this exercise price. In
addition to stock options, employees were greatly encouraged (but not obliged)
to keep stock ownership in the company. Unfortunately, the stock price
decrease that Cendant experienced in 1998 was so dramatic that the exercise
price of many employee stock options was even higher than stock price of
Cendant Company (for instance, options were underwater). Moreover, even
the options that were still in-the-money (for instance, had exercise prices
below stock price of Cendant Corp.) had lost a drastic value amount. Morale
and spirit of the Corporation was extremely low. Employees understood that
the stock options they hoped would provide a significant payoff now cost
almost nothing comparing to their expectations. Therefore in September of the
same year, the compensation committee called a meeting in order to discuss
possible changes that could be made to the compensation plans of the
Corporation aiming to re-energize and re-motivate outstanding employees of
the company. Many of the options were issued by the companies HFS or CUC
and subsequently exchanged for Cendant options after the merger was
completed. When the merger was completed in December of 1997, a
substantial option grant was made to align the future interests of the involved
employees. Additionally, Cendant did not need a vesting period for option
grants. After examination of the data on the outstanding options, the
magnitude of the money loss to the employees became obvious.
In general terms, top executives of CUC, which were led by former Chairman
and CEO Walter Forbes, promoted a laissez-faire environment at the
corporation that encouraged underlings to prepare reports with impunity.
Cendants legal counsel, Willkie Farr & Gallagher, commissioned the 260-page
audit, to be prepared by the accounting firm Arthur Andersen & Co., with
assistance from, Deloitte & Touche, Cendants own auditor company.
Hundreds of interviews were held and more then 80 witnesses interrogated and
finally the report was completed that cited pervasive and numerous instances
in which CUC officials inflated earnings from 1995 to 1997.
Those inflations did not include more than $200 million that were results of
accounting errors in records of CUC which also became the part of restated
Cendant results from fiscal years 1995 to 1997.
The report did not immediately accuse Walter Forbes of fraud. But in one of its
main findings, the auditing committee considered that the inability of Forbes
and of former president and COO of CUC, E. Kirk Shelton, to check the abuses
amounted to grave negligence in best situation and deliberate ignorance at

This is what audit committee wrote on this regard: To the extent that they
were unaware of the irregularities, the amount by which CUC s earnings were
inflated as reported in the restatement suggests that they did not adequately
inform themselves as to the sources and level of profitability of the company.
The report found that operating earnings at CUC had been inflated during the
period of restatement in 17 of 22 operating units. Report stated that CUC
subsidiaries made many unsupported entries, but those directions for the
improper entries came from corporate headquarters of CUC Company.
The auditors found that Cosmo Corigliano, the former CIO of CUC, along with
Anne Pember, CUCs former comptroller, had managed accounting
irregularities. Report also mentioned that neither Corigliano nor Pember agreed
to cooperation with the committee investigators.
Silverman, new CEO of the Corporation said the following about the scandal:
This report brings to a close a difficult period for Cendant employees and
shareholders alike. The investigation has identified how a group of people at
CUC deliberately deceived and misled investors and business partners -and
reveals a corporate culture that encouraged this behavior.
According to Stacey Stowe from International Herald Tribune (Nov. 2006) in
general it took almost eight years and three trials, and only in 2006 U.S.
federal prosecutors won their case against Walter Forbes, the former chairman
of the Cendant Corporation. Forbes was convicted on charges that he managed
an accounting fraud that was the largest on record in year 1998. Investors lost
about $19 billion when stock of Cendant Corporation fell after the disclosure.
A jury of eight men and four women in U.S. District Court deliberated for about
two days and a half before finding Walter Forbes, 63 years old, of New Canaan,
Connecticut, guilty of conspiracy and of two counts of submitting false reports
to the Securities and Exchange Commission of the United States in overreporting earnings of his company by more than $250 million.
Forbes was set free on $1.2 million bail. He was to be sentenced on January, 17
and sentenced to 25 years in prison. Prosecutors claimed that Forbes
overstated earnings at his original company, CUC International, which later
merged with HFS in 1997 in order to form Cendant Corporation - with holdings
that contained among their businesses the Avis and Budget car rental
companies and Coldwell Banker real estate and the Century 21 brokerage firms.
During the trial Cosmo Corigliano testified that the books had been cooked for
years with the supervision of Forbes and that Corigliano and Forbes met on

regular basis in order to discuss how much money would be taken from reserves
that were inflated and used to raise profits to meet set objectives.
The condemnation of Forbes, who resigned from Cendant Corporation with a
$47 million severance payment, followed the settlement of a civil case in 2000,
in which Cendant Company paid $2.9 billion and Ernst & Young paid $335
million. In 2005 Cendant stockholders made the decision to change the
companys name to the Avis Budget Group. Besides Avis Budget, Cendant Corp.
has been divided into publicly traded hotel, real estate and mortgage financing
In other words Cendant Corporation announced its decision to divide into four
companies, as it was necessary to introduce some diversification in order to
appeal to stockholders and striving to raise the value of the post-split up
corporation. These four sectors contain Travel Distribution, Real Estate,
Hospitality and Vehicle Rental Companies.
4. Conclusion
Fraud is said to be the deception that is made by one person or group of people
for personal benefit or to damage another person or to take his money in illegal
way. Definition of fraud is predominantly dependant on legal jurisdiction. Fraud
is said to be the crime, and also the violation of the civil law. The most
common type of fraud is defrauding people of money.
There are about 9 common types of fraud, which include: asset
misappropriation, false accounting, computer fraud, intellectual property fraud
and insurance fraud, infringements or thefts by third parties, corruption,
investment scheme fraud, and money laundering.
It is possible to commit fraud by such means as mail, internet and phone.
Risk situation on fraud commitment can be categorized as profits, processes
and people. Some situations taken independently may not indicate on the
motivation to commit a fraud, but taken along with other factors will appear to
become a motivational factor.
In order to prevent fraud and enhance ethical behavior in the company,
organizations should develop code of ethics according to their core values and
establish services of internal audit and monitoring.
Companies should also obtain all possible information about their employees,
business partners and suppliers, as well as monitor flow of information between
them, in order to reduce possibilities of fraud.

Fraud at Cendant Corporation was the first significant case of fraud in such
tremendous scales. Cendant Corporation was formed on May 27, 1997 with the
merger agreement between the Boards of Directors for HFS, Inc. and CUC
International Inc. Cendant Corporation was created as a conglomerate that
specialized in shopping-club memberships, Internet marketing and traveling.
After a shocking fall of Cendants stock price in 1998, it was found out that top
executives of CUC, which were led by former Chairman and CEO Walter Forbes,
promoted a laissez-faire environment at the corporation that encouraged
underlings to prepare reports with impunity.
As a result of fraud, Kirk Shelton, Cendants former vice chairman was
sentenced to 10 years in prison, Cosmo Corigliano was sentenced to three years
on probation with six months of home confinement and 300 hours community
service, Anne Pember, Former director of accounting at CUC division of CompU-Card and CUC controller, was given two years probation and 200 hours of
community service, Casper Sabatino, Former CUC accountant in charge of the
companys external reporting, received two years probation and finally Walter
Forbes received 12 years and seven months in prison

In May 1997, CUC International, Inc. and HFS, Inc. merged to form one
giant service organization, Cendant Corporation. While investors seemed
excited for this large merger, it was soon announced that a large financial
reporting fraud was announced that would affect CUCs financial statements.
There were several factors that existed at CUC before the merger that
allowed for an environment conducive for fraud to exist. First and foremost,
the upcoming merger with HFS created the pressure at CUC to provide
strong financial statement performance. In combination with this, upper
management pressured employees at every level to participate in shady
transactions, with one employee even testifying that he thought he was
simply doing his job. Also, it was determined during investigations that
CUC had weak internal controls for a company of its size. Cendant actually
reported that 60% of reported net income by CUC in 1997 did not exist
(BusinessWeek). Another example of this was its lack of an automated
accounting system in areas such as recording revenue. Such a system would
have helped record revenue in the correct time intervals instead of all at
once as they were doing, vastly inflating current revenues (BusinessWeek).

In regards to internal controls, auditors have a responsibility to obtain an

understanding of the design and implementation of internal control in order
to assess the control risk of the company. This is typically done through
inquiry of the client, re-performance of procedures, observation or
inspection. This is a basis for beginning the audit process and forming a
strategy for how to proceed. Of the five interrelated components, the control
environment can be seen as the umbrella for which the other four parts fall
under. This is because without an effective control environment, the other
parts will be less likely to provide quality internal controls.
When assessing the control environment of a company, auditors should
consider: the ethical...