On December 31, 2018, the Securities and Exchange Commission (“SEC”) announced that a public rental car company (the “Company”) had agreed to pay a $16 million civil penalty to settle allegations of inaccurate financial reporting and accounting errors. See In the Matter of Hertz Global Holdings, Inc. and The Hertz Corporation, Admin. Proc. File No. 3-18965 (Dec. 31, 2018). The allegations arose out of a restatement the Company filed on July 16, 2015, which restated the Company’s annual, quarterly, and periodic reports from February 2012 to March 2014, as well as certain data in filings from 2008, 2010, and 2013. Notwithstanding the prior restatement, the Company neither admitted nor denied wrongdoing.
According to the SEC, the Company was forced to file a restatement because of a range of accounting errors, including improper subrogation methods, inadequate disclosure of changes to accounting policies regarding the holding periods for the Company’s rental car fleet, and inaccurate representations of its earnings. The combination of these errors, which the SEC claimed resulted from a lack of internal controls and a corporate environment that led to inappropriate accounting procedures, allegedly caused the Company to reduce its previously reported pre-tax income by a total of $235 million.
First, the SEC alleged that the Company attempted to meet internal financial goals in part by using improper estimation methods to understate the allowances or write-offs for uncollectible expenses owed by third parties for vehicle damage. The SEC claimed that the Company’s methods were based on collection rates that were well below historical averages and thus not in accordance with generally accepted accounting principles, and resulted in a cumulative pre-tax misstatement of $48 million. Second, the Company allegedly failed to properly disclose that in 2013 it had extended the holding period for its rental car fleet, which significantly lowered its depreciation expenses. The Company did not report the change in its accounting policy in its Forms 10-Q from the second and third quarter of 2013 or its Form 10-K for 2013. Finally, the SEC alleged that in 2013 the Company improperly reaffirmed a downward earnings revision it had provided, even though internal estimates at the time indicated that its earnings would fall below the revised amount.
The SEC attributed the alleged problems in the Company’s internal financial reporting to insufficient training, unclear reporting lines and a lack of an internal audit, and undue pressure to meet financial objectives, including references to an “inappropriate tone at the top” and a conscious earnings “‘gap-closing’ effort.” However, the relatively small penalty (6.8% of the allegedly misstated amount) and the lack of a Rule 10b-5 charge suggests that the SEC was satisfied that any historical problems had been addressed, as the SEC acknowledged that the Company received substantial credit for its cooperation and remediation.