Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Pastimes : All Clowns Must Be Destroyed -- Ignore unavailable to you. Want to Upgrade?

To: LLCF who wrote (40455)	6/17/2000 12:32:00 PM
From: patron_anejo_por_favor	Respond to of 42523

Speaking of "greater fools", did anyone read Floyd Norris' column in the NY Times yesterday re: CUC? Good stuff! Best quote: "Faking the numbers was my job, and my superiors were encouraging me." Sounds like there's a place for this guy at the BLS! The significance of CUC-Cendant can not be overstated, because it appears to be the prototype for alot of the fraudulant accounting schemes we are now seeing in Dot-commie (Scamazon) and technoland (MicroTragedy). nytimes.com June 16, 2000 FLOYD NORRIS Asleep at the Books: A Fraud That Went On and On and On Were the books ever honest at CUC International? The biggest accounting fraud ever -- one that cost investors $19 billion and involved more than $500 million in phony profits over just three years, now turns out to have gone on almost forever. Cosmo Corigliano was a 23-year-old accountant for Ernst & Whinney when he joined CUC in 1983, the same year it went public. "The activities had started about then," Mr. Corigliano told Judge William H. Walls this week, as he pleaded guilty to fraud charges. Faking the numbers, he said, "was my job, and my superiors were encouraging me." Mr. Corigliano, who rose to become CUC's chief financial officer, is likely to end up in prison. He and a number of his subordinates are cooperating with prosecutors, who are clearly gunning for his bosses at CUC. But for investors, the most interesting question is not whether Walter A. Forbes, CUC's founder, will go to jail. It is how this fraud managed to go on so long. The Securities and Exchange Commission is sure it started by the late 1980's and thinks it may have begun in 1985 or before. It ended in 1998, after CUC merged with HFS to form the Cendant Corporation and a CUC accountant spilled the beans. For all those years, the books were audited by Ernst & Young or its predecessor, Ernst & Whinney. In hindsight, they missed more than a few red flags. A report by Arthur Andersen, another accounting firm hired after the fraud was exposed, described meetings in which Ernst & Young officials asked questions and got odd answers. In one case, there was no explanation or documentation for $25 million in profits. The auditors decided that was not a material amount, and let it go. The Andersen report did not criticize Ernst & Young, but that was no surprise. Ernst & Young had refused to supply information to Andersen until it was promised that the report would not comment on the quality of the Ernst & Young audits. The S.E.C. says that the fraud was easier to pull off because CUC officials knew which subsidiaries would be audited, and therefore hid the most obvious frauds in subsidiaries that they knew the auditors would not look at. As the fraud grew, CUC's old tactics of inflating revenues and suppressing expenses were no longer adequate. So it took to manipulating merger reserves, which are supposed to cover one-time costs related to takeovers and are often ignored by investors. The reserves became a cookie jar in which operating losses could be fraudulently concealed. Unfortunately for CUC, some of its acquisitions were such dogs that the merger reserves were soon exhausted, making it necessary to make more acquisitions. Did the auditors know what was going on? They deny it, and there is no proof they did. But they didn't show much suspicion when confronted with some odd-looking transfers of funds between various accounts. Abraham Briloff, an emeritus professor of accounting at Baruch College, studied the Andersen report and concluded that "the auditors were fooled because, in some measure at least, they wanted to be fooled." Had they blown the whistle, people would have asked why they had not done so years earlier. That is not, needless to say, the way they see it at Ernst & Young. "That suggestion is offensive," said Kathryn Oberly, the firm's general counsel. "The CUC people were so determined to fool the auditors that they could fool any audit firm or any team of auditors." Investors may not find that especially reassuring.