Securities Regulation Daily Hertz CEO pressured employees to manipulate financial reporting numbers
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Friday, August 14, 2020

Hertz CEO pressured employees to manipulate financial reporting numbers

By Amanda Maine, J.D.

The former CEO allegedly pressured staff to "find money" after the company’s financial results fell short of its 2013 forecasts.

The SEC announced that the former CEO of car rental company Hertz has settled charges of aiding and abetting the company’s financial reporting and disclosure violations. Mark Frissora, who will reimburse the company nearly $2 million in incentive-based compensation and pay a $200,000 penalty, allegedly pressured employees to use accounting tricks to meet earnings targets that rendered the company’s financial reports materially inaccurate (SEC v. Mark P. Frissora, August 13, 2020).

Accounting shenanigans. The SEC’s complaint against Frissora detailed how he allegedly pressured subordinates to "find money" by using accounting tricks, which eventually led to Hertz’s 2015 restatement of its financial results for 2012, 2013, and certain prior periods.

According to the SEC, Hertz issued earnings guidance in February 2013 in the range of $1.78 to $1.88 per share, but facing financial and operational challenges as well as existing or projected gaps between its higher budget forecasts and its lower actual financial results, Frissora pressed his subordinates to find ways to close the gaps between projected and actual financial results. The SEC stated that Frissora’s actions created a corporate environment where he and Hertz placed an inappropriate emphasis on meeting forecasted budges, business plans, and earnings estimates.

The SEC alleged that Frissora pressured his staff to "find money" for savings in reserve accounts in 2013 to meet the company’s forecasted earnings. In response, the Hertz team targeted subrogation charges in the company’s accounting; i.e., offsetting the expenses Hertz incurred for vehicle damage during rental periods. According to the SEC, Hertz made adjustments to its subrogation accounting that departed from the company’s historical methodology for calculating subrogation reserves, resulting in increased reported financial results.

The SEC also alleged that Frissora wanted to "lower the reserve" in Hertz’s rental business to increase the company’s earnings, and in response, Hertz employees revised reserve methodologies that yielded $3 million in short-term savings but were not based on historical experience. These methodologies also did not satisfy GAAP and were not reviewed with Hertz’s auditor. Hertz’s controller, who was sanctioned by the SEC in 2019 for his role in overstating Hertz’s income, approved the methodology changes that materially overstated Hertz’s pretax income.

Frissora also caused Hertz to extend the planned holding period for its rental car fleet without properly disclosing the change, according to the SEC. Prior to the second quarter of 2013, Hertz’s rental cars had an average holding period of 20 months. Under pressure to meet financial targets, Frissora extended the planned holding periods to either 24 or 30 months, which had a short-term accounting benefit of spreading out the required depreciation expense for Hertz on its cars, but resulting in a longer-term business risk of more costly maintenance on its cars, hurting Hertz’s brand. The SEC alleged that Hertz did not adequately disclose its decision to extend the planned holding periods for a substantial portion of its fleet. The SEC’s complaint also stated that after Frissora left Hertz in 2014, the new management team reverted back to the shorter planned holding periods.

Frissora also pressured staff to meet the company’s earnings guidance, the SEC alleged. When Frissora learned that internal analyses forecasted growth on the lower end of the guidance, he led an initiative that would allow Hertz to claw its way back to the higher end of the earnings guidance. He directed subordinates to determine why the company’s estimates had changed, and in an earnings call, he responded to an analyst’s question by reaffirming the previous guidance range, despite knowledge that it would be lower, according to the SEC.

2015 restatement and SEC charges. In July 2015, Hertz issued restatements of its financial reports for 2012, 2013, and other prior periods. The restatement, which identified 17 areas with material accounting errors and 11 material weaknesses in the company’s internal controls over financial reporting, reduced Hertz’s previously reported pretax GAAP income by $235 million. In addition to the settled charges brought against Hertz’s controller, Hertz itself agreed to pay a $16 million civil monetary penalty to settle the SEC’s charges against it in late 2018.

Settlement with Frissora. The SEC charged Frissora with aiding and abetting Hertz’s reporting and disclosure violations. As part of his settlement with the SEC, Frissora agreed to pay a $200,000 civil penalty. In addition, Frissora agreed to reimburse Hertz nearly $2 million in bonus and other incentive-based compensation he received as a result of the overstated financial results under the Sarbanes-Oxley Act’s clawback provision. The settlement is subject to court approval, and Frissora has not admitted or denied the SEC’s allegations.

The case is No. 20-cv-10453.

Attorneys: Marc Peter Berger for the SEC.

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