Cendant Corp.'s former accounting firm, Ernst & Young, said it appears it was intentionally deceived when it performed the audit of the direct marketer and franchiser's CUC International unit.
Cendant said last week that it will restate earnings for 1997 by as much as $250 million, or 28 cents a share, because of accounting fraud at the discount shopping club unit, including the booking of fictitious revenue.
Ernst & Young has vouched for the accuracy of the audit since Cendant, which also owns such brands as Avis car rentals and Century 21 real estate brokers, first admitted on April 15 that it uncovered accounting irregularities.
"It appears that efforts may have been taken to deceive the auditors," Ernst & Young said in a statement. "The best planned and performed audit may not detect material misstatements if there is intentional, collusive fraud by a company's financial management."
An Ernst & Young spokesman declined to comment beyond the statement, which added that the firm is cooperating with Cendant and its teams of professional advisors in the investigation.
Shares of Stamford, Conn.-based Cendant are down about 53% since the accounting problems were disclosed. Cendant fell 69 cents to close at $16.81 on the New York Stock Exchange. Cendant, which was formed late last year by the merger of CUC and franchiser HFS Inc., "is evaluating all its options," said company spokesman Elliot Bloom when asked if Cendant was considering legal action against Ernst & Young.
In May, Cendant filed papers with the Securities and Exchange Commission saying its investigation of accounting irregularities "may result in disagreements" with the accounting firm.
Cendant is now using Deloitte & Touche, which was HFS' accounting firm before the merger.