Hertz details reasons behind accounting errors
Updated 9:05 PM EDT
While Hertz treated Mark Frissora’s resignation as its CEO and chairman as a termination “without cause,” the company is now saying his management style may have led to the rental car giant’s accounting missteps.
In a recent regulatory filing, Hertz Global Holdings Inc., said his “management style and temperament created a pressurized operating environment at the company, where challenging targets were set and achieving those targets was a key performance expectation.”
The filing, made July 16 with the U.S. Securities and Exchange Commission, came as Hertz wrapped up its financial restatements, which cut the company’s reported earnings from 2011 through 2013 by a total of $144 million.
Hertz, which is building its new world headquarters in Estero, first disclosed it had uncovered accounting problems in May 2014. Less than a month later, the company announced it would have to restate and correct three years worth of financial results.
Frissora resigned in September, citing personal reasons, and received a severance package that included a cash payment of nearly $10.5 million, along with other benefits.
While Hertz did not comment publicly on what role Frissora may have played in its financial reporting mess, an explanatory note in its recently filed 2014 annual report said the company’s internal investigation found “an inconsistent and sometimes inappropriate tone at the top” that may have influenced one or more employees to record improper accounting entries.
“There was in certain instances an inappropriate emphasis on meeting internal budgets, business plans, and current estimates. Our former chief executive officer further encouraged employees to focus on potential business risks and opportunities, and on potential financial or operating performance gaps, as well as ways of ameliorating potential risks or gaps, including through accounting reviews, ” the 10-K filing states.
As a result, Hertz concluded there was an environment that may have led to inappropriate accounting decisions and the failure to disclose critical information needed for an effective accounting review.
Frissora isn’t commenting on the filing. He’s now president and CEO of Caesars Entertainment Corp. In a statement, a spokeswoman for Caesars defended him.
“Hertz’s disclosure very specifically did not suggest any wrongdoing by Mark. In fact, it described a CEO focused on driving performance and results and merely posits that this focus on driving performance and results may have led to some of the accounting errors. I suppose that it is also possible that the errors were caused by the weak accounting practices and skills of those that made them. Caesars Entertainment is fortunate to have Mark at its helm,” said Jan Jones Blackhurst, Caesars Entertainment’s executive vice president of communications.
Some have speculated Hertz could consider exercising its so-called clawback policy. Such policies allow companies to recover compensation from executive officers if it’s determined to have been wrongly awarded.
A spokesman for Hertz said, “We do maintain clawback policies with respect to our compensation arrangements. The applicability of those policies is a matter for the board.”
Charles Elson, an expert in corporate governance and a finance professor at the University of Delaware, said many companies have clawback policies, but exercising them can be tricky, if not impossible.
“Clawbacks are just really hard to do,” he said. “One is the money has usually been spent and two they are just hard to enforce legally.”
Though the Securities and Exchange Commission has proposed a rule that would require U.S. companies to recover incentive-based compensation from current and former executives when there’s an accounting restatement, it has not yet been adopted and experts say it’s unlikely to apply retroactively to Hertz.
Frissora’s management style was just one of many issues Hertz found in its internal control over financial reporting that led to its restatement. According to the filing, a few of the other weaknesses were:
Not having the right employees, with the right level of knowledge, experience and training needed to meet its financial reporting requirements.
Not establishing clear reporting structures, reporting lines and decisional authority responsibilities.
Not designing effective controls over its procurement processes for goods and services, outside of its fleet of vehicles.
Hertz also identified weaknesses in its risk assessment, information and communication and monitoring processes.
The financial misstatements prompted governmental investigations by the Securities and Exchange Commission and a state securities regulator, which the company has warned could lead to enforcement actions.
Over the past 18 months, Hertz has seen a shake-up in its management, which includes a new CEO, chief financial officer and general counsel. The company said it has hired more than 20 highly qualified vice president and director level accounting employees, and has put together a new senior accounting team.
“As individuals and as a company, our commitment is clear. Only the highest standards of financial reporting and discipline will be accepted. The talent we’ve put in place is a testament to the seriousness with which we approach this commitment,” said John Tague, Hertz’s CEO in a conference call about the company’s financial restatement.
He said there was still plenty of work to be done.
“While the number of material weaknesses are significant, remediation work is well underway with considerable progress expected still this year,” Tague said.
With its financial restatement finalized, Hertz can now focus on completing the separation of its equipment rental business, HERC, headquartered in Bonita Springs. The spinoff is targeted for completion in the second quarter of 2016. Hertz plans to use the cash from the transaction to fund share repurchases and reduce its debt.
As it looks to drive forward, Hertz will continue to work on strengthening its foundation. Initiatives include refreshing its car rental fleet, cutting operational costs, and improving the customer experience.
Andrew Hill, president and co-founder of Naples-based Andrew Hill Investment Advisors Inc., said in the end Hertz’s financial restatement could have been much worse, putting them into the negative.
“They got rid of a problem. They were in a penalty box. Now they are out,” he said.
But, he said, Hertz still faces some big challenges, including its low stock price and the growing popularity of more affordable ride-sharing services such as Lyft and Uber.
“I think Uber is killing them,” Hill said. “Whether it’s my perception or reality, I think that is what is going on.”
Hertz, he said, needs to get more innovative and shed its stodgy image.
“It seems like an old dinosaur company,” Hill said. “It seems like an IBM, or something like that, that’s just not keeping up with the technology of today. But they do have a heck of a brand.”