NEW YORK (CNNfn) - Executives at the former CUC International, now a part of Cendant Corp., "deliberately and fictitiously" manufactured about $500 million in fake revenue over a three-year period in an attempt to ensure CUC's earnings matched analysts' expectations, according to a long-awaited report Thursday by Cendant's auditors.
The report, released midday, capped an often bruising, four-month investigation into accounting irregularities at the former CUC business units. CUC merged late last year with HFS Inc. to form Cendant, a marketing company and franchiser of brands such as Ramada hotels, Avis rental cars and Century 21 real estate.
The investigation underscored what Wall Street already knew: that CUC's top executives, led by former chief executive officer and chairman Walter Forbes, fostered a laissez-faire environment at the company that encouraged underlings to cook the books with impunity.
The irregularities came to light in April. The disclosures sent Cendant stock into a tailspin and forced the resignation of Forbes from his new post as Cendant chairman, along with eight other directors who had served under him at the former CUC.
The release of the auditors' report followed the first meeting of Cendant's reconstituted 14-member board under the stewardship of Forbes' successor, former HFC chief Henry Silverman.
The 260-page audit was commissioned by Cendant's legal counsel, Willkie Farr & Gallagher, and prepared by the accounting firm Arthur Andersen & Co., with assistance from Cendant's own auditor, Deloitte & Touche.
Based on hundreds of hours of interviews with more than 80 witnesses, the report cites "numerous" and "pervasive" instances in which CUC officials inflated earnings from 1995 to 1997.
It does not include more than $200 million in accounting errors in CUC records which are also part of restated Cendant results from fiscal 1995 to 1997.
The report does not directly accuse Forbes of fraud. Rather, in one of its central findings, the auditing committee asserts that the failure of Forbes and of CUC's former president and chief operating officer, E. Kirk Shelton, to check the abuses amounted to grave negligence at best and willful ignorance at worst.
"To the extent that they were unaware of the irregularities," the auditing committee wrote, "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 income at CUC had been inflated during the restatement period in 17 of 22 operating units. It said that while "numerous unsupported entries" were made by CUC subsidiaries, "the directions for the improper entries came from CUC corporate headquarters."
The auditors found that Cosmo Corigliano, the former chief financial officer of CUC, and Anne Pember, CUC's former comptroller, had ordered accounting irregularities. (Neither Pember nor Corigliano agreed to cooperate with the investigators, the report said.)
Among the report's other findings:
- CUC apparently intended to use a portion of the reserve established in connection with its merger with HFS in December 1997 to unlawfully increase earnings in 1998 and possibly in future periods as well.
- More than $500,000 was paid to Forbes in September 1997 to reimburse him for "undercharging" the company for trips taken in 1995 and 1996.
- A purported plan was devised by CUC executives that involved the "improper" reversal of merger reserves into revenues in 1998.
Silverman expressed hope Thursday the auditing report would bring closure to a debilitating scandal that has stripped Cendant's stock of about half its value since April, when the disclosures were made.
"This report brings to a close a difficult period for Cendant employees and shareholders alike," Silverman said. "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."
Though auditing committee members had received copies of the final report earlier this week, they had refused to comment on it before Thursday's board meeting.
The results of the audit already have forced Cendant (CD) to restate its 1997 earnings downward 28 cents a share, or $140 million. In New York Stock Exchange composite trading Thursday, Cendant shares were down 7/8 at 13-11/16, a steep slide from their 52-week high of 41-11/16.