Evaluate the actions of Cendant management with respect to its obligations to shareholders. Did it meet those obligations? Why or why not?

Just need the power point

The PowerPoint presentation must be at least 20 slides in length; 10-12 point font; double-spaced; and include a cover page, introduction, body, summary or conclusion, and works cited slides. Although this is not a scientific-type writing assignment, and is mostly creative in nature, references are still very important. At least six authoritative, outside references are required (anonymous authors or Web pages are not acceptable). These should be listed on the last slide titled “Works Cited” or “References,” depending on the format standard used. Appropriate citations are required throughout the PowerPoint presentation. All DeVry University policies are in effect, including the plagiarism policy. Presentations are due during Week 8 of this course.

Suggested Milestones

Note: The only deliverable (in the Dropbox) is the presentation in Week 8. However, to complete this project successfully, it is suggested that you complete the tasks listed below in the weeks noted:

Task 1: Read Major Case 4: Cendant Corporation, pages 468-474 (Week 1).

Task 2: Answer the questions 1–4 at the end of the case (pp. 468-474) in terms of the concepts we study in Weeks 1 to 7 (through Weeks 2 to 7):

Six Pillars of Character and Modern Moral Philosophies (Chapter 1) Professional Judgment in Accounting and the Decision-making Process (Chapter 2) Corporate Governance, Codes of Ethics, and Ethical Management (Chapter 3) Accounting Codes of Conduct and Standards (Chapter 4) Audit Responsibilities and Accounting Fraud (Chapter 5) Legal and Regulatory Obligations in an Ethical Framework (Chapter 6) Earnings Management and the Quality of Financial Reporting (Chapter 7) International Financial Reporting (Chapter 8)

Questions

1. 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.

Step 2 The GAAS specifically says in Auditing Standards: Standards for Field Work (3), that the auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion relating to financial statements. Similarly, section 56 article V Principles of Professional Conduct, AICPA requires that the auditor should exercise due care, however, in case of Cendant, Ernst & Young did not ask CUC executives for documentation to support their financial statements and never reviewed hundreds of improper entries made after quarters closed. Ernst & Young did not exercise professional skepticism and there were close ties between Ernst & Young and CUC financial executives.

Step 3 The actions of Cendant management with respect to its obligations to its shareholders are illegal as well as unethical. The laws required that Cendant management should report the correct financial situation of the company in its financial statements. Instead, Cendant management chose to report inflated revenues and earnings. From the deontological ethical perspective Cendant management has the duty to report correct information to its shareholders. Instead, Cendant reported misleading information in its financial statements. Cendant did not meet its ethical obligations to the shareholders of Cendant. The revenues reported by Cendant were incorrect and led to an artificial increase in the share prices of Cendant. The net profits of Cendant satisfied the expectation of Wall Street but failed in its legal and ethical obligations to its shareholders. The shareholders were financially hit when the prices of Cendant suddenly collapsed. The shareholders had trusted the management of Cendant but the management had failed them.

Step 4 From the NYSE listing requirements we suggest that additional governance requirements that can be imposed on boards is that listed companies should have a majority of independent directors. The board must affirmatively determine that the director has no material relationship with the listed company. Further no director who is a former employee, auditor, part of interlocking directorate, or family member of the listed company can be independent until five years after the employment has ended. From the Sarbanes Oxley act, additional governance requirements are that Cendant should have each member of the audit committee to be an independent member of the board of directors. This means that the director does not receive any fees from the company other than those for serving on the board. At least one audit committee member must be designated as a financial expert.

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