Hertz (NYSE:HTZ) is having an unplanned weekend sale as its shares dropped 9% after the announcement that several accounting irregularities were found. The shares dropped into negative territory for the year but are well off of recent lows. These accounting irregularities will result in a restatement for calendar year 2011 and will cause the company to delay filing its 10-Q for March 2014.
The accounting issues were primarily related to two issues: capitalization and depreciation for non-fleet assets, and the allowance for doubtful accounts in Brazil. The 2011 financial statements can't be relied on and need to be restated, and this is causing a review of 2012 and 2013 as well.
First off, the restatement is focusing on expenses, not aggressive revenue recognition policies or anything that indicates dramatic malfeasance. Revenue growth, which is the circulatory system of any company, will not change. Secondly, since it seems like the biggest issue occurred in 2011, the only year mentioned, the company will definitely have to restate its results for that year but this may have little or even no impact on 2014 profits. Keeping this all in context, the auditors didn't even catch it. PriceWaterhouseCoopers is a reputable auditing firm and if the errors or omissions were dramatic, the auditors would have indicated something in the annual statement.
The biggest issue for shareholders may be perception. The stock could be put in the penalty box even after the completion of the restatement of the 2011 financials. The impact may flow through to 2012 and 2013 and a statement in the 8-K filling indicates that these will be reviewed as well. Institutional shareholders may just decide to wait and see what the review finds before committing capital.
Last September, Hertz CFO Elyse Douglas resigned, stating that she chose not to move to the new company headquarters in Florida. Maybe it's a good thing she chose not to take the position because her job would be under review today. Is it just a coincidence that these issues are coming into the light now? When a CFO quits, it can foreshadow a negative event. It isn't a sure sign by any stretch of the imagination but when you see the headline, your reflex should be to investigate.
According to her LinkedIn profile , Elyse was promoted to Chief Financial Officer in 2007 after holding the position of treasurer for 15 months. Beyond Hertz, she had extensive experience as both a treasurer and auditor at companies that included Coty, Nabisco, and JP Morgan Chase. However, looking back at her career, in an interview with CFO magazine, she cited some challenges in her transition from Treasurer to CFO. She mentioned that "it was new for me to take on a broader role, managing larger, more diverse groups" and "becoming accustomed to having a high-level focus and relinquishing the need to know all of the details proved to be the biggest adjustment ".
Bad timing as competitors' results are improving
This problem comes at a bad time as competitors, Avis (NASDAQ:CAR) and United Rentals (NYSE:URI), are passing through 52-week highs on strong financial results. Avis's Zipcar and Payless acquisitions drove EBITDA growth of 26% in the most recent quarter. United Rentals on the other hand saw 24% growth in sales of new equipment which helped drive a 7% increase in revenue, as the economy strengthened and investment flowed back to equipment purchases.
While the restatement may not have long-lasting effects on the actual financials shares of Hertz may remain in the penalty box as the financial investigation flows through its financial statements. As always Foolish investors should do their own research before making any investment decisions.
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David Eller has no position in any stocks mentioned. The Motley Fool owns shares of Hertz Global Holdings and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.