Friday, June 5, 2015

Hertz, We Have a Problem: Internal Control Weaknesses


I wrote this prior post about the accounting internal controls and financial restatements at Hertz Global Holdings (the car rental firm). This post goes into more detail on what exactly happened, from an accounting standpoint.

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Restatement and revision
Companies that issue stock and bonds to the public must file annual Form 10-K and quarterly Form 10-Qs with the Securities and Exchange Commission (SEC). These firms also file Form 8-K to disclose any other issues during the interim (Between quarters). Here are the detail from Hertz’s June 6, 2015 Form 8-K:

·      Audit Committee: The Audit Committee of the Board of Directors is responsible for hiring the external auditor and overseeing the audit. Hertz’s Audit Committee reports that the 2011 financials are being restated, and the ’12 and ’13 financials are being revised.

·      Financial statement review: The Committee is supervising a complete review of ’11, ’12 and ’13 accounting processes. The review may require financial adjustments and additional financial restatements.

·      Material weakness: The Committee reports at least one material weakness in internal controls for ‘2013. Management (who is responsible for implementing internal controls) is amending the Management Report on Internal Controls over Financial Reporting. You’ll find that report in the Annual Report.

·      Adverse audit opinion: Hertz expects to receive an adverse opinion on internal controls for financial reporting in the 2013 financial statements. Page 96 of the 2013 Hertz Annual Report displays the audit opinion before any changes. Keep in mind that the date of the audit opinion is March 19, 2014- before the Audit Committee report.


Where we disagree
Page 189 (Item 9) of the 2013 Annual Report explains that management and the external audit disagree on accounting and financial disclosure. Management concluded that their controls were effective. Management then explains that the external auditor performed an attestation report on internal controls over financial reporting. Important: An attestation is not an audit. The auditor is not “opining”- giving an opinion- when they perform an attestation.

Based on the June 2015 Form 10-K, both management’s report on internal controls and the audit opinion will change.

Sources of material errors
Interestingly, each of the errors pointed out in the Form 8-K involved accounting estimates. Estimates require judgment- and that’s where disagreements can occur between management and external auditors. According to the Form 8-K (italics added):

“The most material errors identified to date relate primarily to the capitalization and timing of depreciation for certain non-fleet assets, allowances for doubtful accounts in Brazil, allowances for uncollectible amounts with respect to renter obligations for damaged vehicles, restoration obligations at the end of facility leases and certain other items.”

Choices about capitalization vs. depreciation involve judgment. So do decisions about allowance for doubtful accounts.

Have you been involved in discussion about accounting estimates? I’d love to hear from you.

Ken Boyd
St. Louis Test Preparation
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
Co-Founder: accountinged.com
(website) www.stltest.net


Image: Maciej Lewandowski, Vintage Cars, (CC By SA-2.0)