Hertz to pay $16M civil penalty for accounting violations

Car rental company Hertz Global Holdings will pay a $16 million civil penalty to settle a case concerning inaccurate financial reporting, the Securities and Exchange Commission announced in an order filed Dec. 31.

According to the SEC cease-and-desist order, from at least February 2012 through March 2014, Hertz’s public filings materially misstated pretax income due to accounting errors made in several business units and over multiple reporting periods, as reflected in the restatement Hertz filed in July 2015.

“Part of the misstated income resulted from errors made in various accounts that are subject to management estimate,” the SEC order stated. “For example, Hertz’s car rental business routinely recovers sums of money from third parties for damages that occur during rental. Hertz estimated an allowance for uncollectible amounts as an offset to what it recorded as potential recoveries.”

“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 SEC order continued. “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 SEC order stated that “pressure also existed at times when other inadequate disclosures were filed with the Commission. 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,” the SEC order stated. “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.”

Also, after having already revised its earnings guidance downward, Hertz reaffirmed the revised guidance publicly in November 2013 despite certain internal analysis indicating that the revised guidance had been based in part on inaccurate information and that certain recent internal estimates fell below the low end of that guidance range.

On July 16, 2015, Hertz restated its financial results for 2012, 2013, and prior periods, including selected data for 2011 (unaudited). Including revisions made in early 2014, the company reduced its previously reported GAAP pretax income by a total of $235 million.

According to the SEC order, the restatement identified 17 areas with material accounting errors across the company’s business units, identified additional information regarding historical depreciation and planned holding periods, identified 11 separate material weaknesses in Hertz’s internal controls over financial reporting, and acknowledged that “an inconsistent and sometimes inappropriate tone-at-the-top” existed and may have contributed to a number of errors, misstatements, and omissions.

Based on the foregoing, Hertz violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. Hertz also violated Section 15(d) of the Exchange Act and Rules 12b-20, 15d-1, 15d-11 and 15d-13.