Major Case Study
Cendant Corporation
1 Briefly summarize the accounting techniques used by Cadent to manipulate financial results. Categorize each technique into one of Schilit’s financial shenanigans.
Cendant used aggressive accounting to shift current marketing expenses to a later period by capitalizing the cost; this is shenanigan number 4. Cendant also swift future expenses to the current period and later released reserves into income. When Cendant made acquisition, it took large restricting charges to create bogus income; this is shenanigan number 7. In subsequent period, Cendant released these reserves into income; which is shenanigan number 5.
2 Describe the failing 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.
The EY auditors provided accounting advice as well as audit services to CUC and Cendant in connection with the establishment and use of restructuring reserves. The auditors excessively relied on management representations concerning the appropriateness of the reserves and performed little substantive testing despite evidence that the reserves were improperly established and utilized. In the course of providing accounting and auditing services, the auditors failed to recognized evidence that the company’s establishment and use of the Cendant reserve did not conform to GAAP. According the GAAS, the auditor must maintain independence in mental attitude in all matters related to the audit, but the EY auditor failed to do so. And they did not exercise due professional care during the performance of the audit and the preparation of the report. The auditors performed little substantive testing despite evidence that the reserves were improperly established and utilized and they performed little substantive testing which cause the reserves were