Problems at Cendant's predecessor continue to impact its subsidiary
Sierra.
Cendant Admits Red Ink
Restated earnings show large loss, not gain, for 1997; internal report
suggests fraud reached Sierra
September 30, 1998 18:00
Perhaps some of the money you spent on Warcraft, Starcraft and other
games went to pad the golden parachutes of some ex-Cendant executives.
Cendant, parent company of Sierra On-Line and Blizzard Entertainment,
yesterday restated its earnings for 1997. Actual results for 1997 were
a net loss of $217.2 million, not the net income of $55.4 million
originally reported in March.
The earnings were restated in order to comply with a Securities and
Exchange Commission request, and to correct for "irregularities and
errors" discovered in its books earlier this year--$150 million worth
in 1997 alone, and some $500 million worth over three years.
The term "irregularities" is a specific word used in business legalese
to refer to "fraudulent financial reporting undertaken to render
financial statements misleading, sometimes called management fraud,
and misappropriation of assets, sometimes called defalcations,"
according to the American Institute of Certified Public Accountants.
After its problems became public, Cendant's stock plummeted steeply
from its April high of just over $41, and has been trading at about a
quarter of its former value since. It closed today at $11.62.
Cendant's erstwhile chairman Walter Forbes and a number of other board
members and officers were forced out last July as a result.
In August, an audit committee set up by Cendant's current Board of
Directors launched an investigation. It concluded, in its report, that
"more than one-third of the total income, excluding merger-related and
unusual charges, reported by CUC during the Restatement Period was
deliberately and fictitiously manufactured", so the company could meet
Wall Street analysts' earnings expectations.
Among the Cendant subsidiaries that had their books examined were
Sierra and Davidson. According to the report, operating income was
inflated in 17of the 22 operating units of CUC, and Sierra and
Davidson were involved in some of the irregular bookings.
Cendant's internal report gives one example of such behavior,
involving Sierra:
"On January 8, 1997, and effective December 31, 1996, Comp-U-Card [a
CUC subsidiary] charged the Ideon [another CUC subsidiary] reserve
$1.1 million and transferred that amount, through an intercompany
payable, to Sierra to cover 'integration' costs purportedly incurred
by Sierra in the period leading up to and subsequent to the
acquisition of Sierra by CUC.
"Sierra then used the intercompany transfer it had received from
Corporate to offset costs that previously had been charged to expense.
The expense reductions were booked to the month of October, 1996 This
had the effect of reducing expense and increasing fiscal 1997 income
by $1.1 million." (Emphasis ours).
According to Cendant's own report, this is bad accounting:
"The costs which were offset against the intercompany transfer do not
qualify as merger-related costs but instead represent normal operating
costs. Because these costs should not have been charged against the
Ideon reserve, the charge is being reversed as part of the
Restatement."
This incident involving Sierra was only one of many irregularities
detailed in the report, though the report suggests that Sierra's
accountants were acting on orders from above.
Instead the report put much of the blame on high level executives at
CUC, including Forbes and Kirk Shelton, former president and chief
operating officer of CUC International. A copy of the report was sent
to the U.S. Attorney for the District of New Jersey.
But Forbes seems to have made out all right--according to documents
filed by Cendant with the SEC this week, Forbes was paid nearly $10
million in 1997, and, according to a Reuters report, left Cendant in
July with a $35 million "severance package".
Cendant is also investigating approximately $550,000 in cash advances
and approximately $1.5 million in aircraft, travel and lodging
allowances given to Forbes between 1995 and 1998.
Forbes headed CUC International, one of the two companies that merged
in late 1997 to form the Cendant Corporation; Sierra and Blizzard were
both CUC companies. The other company in the merger was HFS
International, but the accounting irregularities that have hurt
Cendant were discovered only in the books of former CUC divisions, and
Cendant is now headed by Henry Silverman, formerly the top executive
of HFS International.
"All of us at Cendant are now focused on the future and are
concentrating on the job of restoring confidence in our business,"
Silverman said in a recent statement. "Our outstanding employees have
remained focused on building our business and on showing to investors,
business partners and customers each day how Cendant uniquely can add
value for them."
Besides its game companies, Cendant owns a number of well-known
consumer-oriented businesses, including Avis, Ramada, and Century 21,
and employs some 40,000 people worldwide.
Recently, Cendant announced its intention to sell off its computer
entertainment division.
--Jason Bates