The Securities and Exchange Commission has imposed a $16 million civil penalty on Hertz Global Holdings and its subsidiary Hertz Corporation, the car rental giant, for misstating pretax income because of accounting errors.
Between February 2012 and March 2014, Hertz’s public financial filings “materially misstated” the company’s pretax income because of the accounting errors in a number of business units, according to the SEC. Some of the misstated income came from errors in different accounts subject to management estimates. For example, the SEC noted that Hertz’s car rental business routinely recovers money from third parties for damages occurring during a car rental. Hertz estimated an allowance for uncollectible amounts as an offset to what it recorded as potential recoveries, but for years, Hertz’s allowance-related expenses were understated and its income was inflated because the company relied on inappropriate estimation methodologies that resulted in inadequate allowances and write-offs, according to the SEC.
“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,” said the SEC. “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.”
In 2013, Hertz decided to extend the holding periods of a significant part of its car rental fleet in the U.S. “That decision, and its impact on aspects of Hertz’s business, were not adequately disclosed to investors,” said the SEC. “Also in 2013, 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.”
In July 2015, Hertz restated its financial results for 2012, 2013 and prior periods, including some unaudited data for 2011. Including some revisions in early 2014, Hertz reduced its previously reported pretax income by $235 million, identifying 17 areas with material accounting errors across its business units.
Without admitting or denying the SEC’s charges, Hertz agreed to the $16 million penalty, according to the
Hertz did not immediately respond to a request for comment, but in an
