Hertz Global to Pay $16M to Settle SEC Charges over Accounting Errors
The Securities and Exchange Commission (SEC) has agreed to accept a settlement offer by Hertz Global Holdings (HTZ.N), for misstating pretax income due to accounting errors made in numerous business units, over multiple reporting periods. They were reflected in Hertz’s filing on July 16, 2015.
In its order, SEC states that part of the misstated income resulted from errors made in various accounts that are subject to management estimates. Upfront the order explains that Hertz Global Holdings and The Hertz Corporation, solely for the purpose of these proceedings, and any other proceedings brought by or on behalf of the Commission, or which the Commission is a party, does not admit or deny the findings, except as to the SEC’s jurisdiction over them.
As an example, the Commission explains that Hertz’s car rental business routinely recovers sums of money from third parties for damages that occur during rental. The company estimated an allowance for uncollectible amounts as an offset to what it recorded as potential recoveries. SEC states, “For years, Hertz’s allowance related expenses were understated and income was inflated because Hertz relied on inappropriate estimation methodologies that resulted in inadequate allowances and write-offs. The inappropriate methodologies occurred within a pressured corporate environment where, in certain instances, there was an inappropriate emphasis on meeting internal budgets, business plans, and earnings estimates.”
The Commission asserted that pressures also existed at times when other inadequate disclosures were filed with the SEC. “For example, Hertz, consistent with the regular course of its business, routinely estimated how long it would hold cars before disposing of them and replacing them. The planned holding periods were one of the variables in the formula Hertz used to depreciate its car rental assets, and also could have impacted other aspects of Hertz’s business, such as maintenance costs.” SEC add that during 2013, Hertz decided to extend the holding periods of a significant portion of its U.S. car rental fleet. “That decision, and its impact on aspects of Hertz’s business, were not adequately disclosed to investors,” the government agency scolded.
After having already revised its earnings guidance downward, in 2013 Hertz reaffirmed the revised guidance publicly in November 2013 despite certain internal analysis indicating that the revised guidance had been based in part on in accurate information, and that certain recent internal estimates fell below the low end of that guidance range.
SEC also reported that on July 16, 2015, Hertz’s Restatement identified 17 areas with material accounting errors across the company’s business units, 11 separate material weaknesses in Hertz’s internal controls over financial reporting and acknowledged that “an inconsistent and sometimes inappropriate tone at the top” had existed and may have contributed to a number of errors, misstatements and omissions.”
Based on the behavior of Hertz mentioned above, SEC’s Order stated that Hertz Global Holdings, Inc. violated various sections of the Securities and Exchange Act, as did Hertz Corporation, presenting all the details of Hertz’s actions and violations. The Commission then deemed it appropriate to impose certain sanctions agreed to in Hertz respondents Offer of Settlement.
Hertz Holdings was ordered on December 31, 2018, to pay electronically a civil money penalty in the amount of $16,000,000 to the Securities and Exchange Commission with 30 days.