MBA FPX 5910 Assessments 4 Capstone Project MBA-FPX5910 MBA Capstone Experience Capstone Project: Hertz

Introduction

Hertz, a longstanding player in the car rental industry, filed for bankruptcy in August 2020 amid the COVID-19 pandemic. This financial crisis was attributed to several factors including unprofitable acquisitions, leadership mismanagement, financial inaccuracies, ongoing legal issues, declining consumer trust, and reduced employee satisfaction. This Capstone project aims to explore the accounting errors in Hertz Global Holdings’ annual reports. The company is seeking to reclaim seventy million dollars in bonuses from former CEO Mark Frissora and other senior executives due to their involvement in accounting scandals and financial mismanagement (AccountingToday, 2019).

Hertz Global Holdings, Inc. History

Hertz was founded in Chicago in 1918 by Walter Jacobs with a fleet of twelve Model T Ford cars (Lachapelle, 2017). In 1923, Jacobs sold the company to John D. Hertz, who renamed it “Hertz Drive-Ur-Self System” and made it a subsidiary of his Yellow Truck and Coach Manufacturing Company (Lachapelle, 2017). According to Chokshi (2020), Hertz’s ownership changed multiple times over the next century, including periods under General Motors and the Ford Motor Company. In 1925, Hertz sold a controlling interest to General Motors, which later acquired the remaining shares in 1943 (Companies History, 2019). Hertz was the first car rental company to establish a reservation office at Chicago’s Midway Airport in 1942 and expanded into Europe in 1944 (Companies History, 2019). In 1953, Hertz repurchased its car rental business from GM through Omnibus Corporation, renamed it “The Hertz Corporation,” and took it public on the New York Stock Exchange (Companies History, 2019).

Hertz later became a subsidiary of RCA, joined UAL Corporation, and was sold to Park Ridge Corporation, which was then owned by Ford Motor Company and Hertz’s senior management (Companies History, 2019). In 2005, Ford announced Hertz’s removal from its portfolio, and the company was sold to Clayton, Dubilier & Rice, The Carlyle Group, and Merrill Lynch Global Private Equity for $15 billion (Companies History, 2019). The company went public again in 2006. Hertz remains a significant entity in the car rental industry, with Enterprise and Avis as its main competitors. By June 2020, Hertz, Enterprise, and Avis together dominated ninety-five percent of the U.S. rental car market (Barro, 2020). Hertz’s fleet included 10,200 corporate locations, around 38,000 employees across 145 countries, and a fleet of over 500,000 cars (Chokshi, 2020).

Company Problem

Hertz’s journey from an industry leader to a bankrupt entity involves examining its recent history. Sales grew from $7.6 billion in 2010 to $11 billion in 2014 but fell to $9.8 billion in 2019 (Welch, 2020). Since 2014, Hertz has experienced multiple CEO changes, with each leader implementing significant changes to save the company. The company’s outdated fleet and obsolete computer systems contributed to its struggles (Chokshi, 2020). Competitors like Enterprise and Avis have more stable management teams and better adapted to the global business stoppage (Chokshi, 2020).

Mark Frissora, CEO from 2006 to 2014, oversaw Hertz’s $2.3 billion acquisition of Dollar Thrifty, which expanded the fleet by twenty percent and enhanced its market position. In 2013, Hertz introduced the Firefly brand and expanded into the Chinese market, resulting in substantial revenue increases (Lachapelle, 2017). However, Hertz’s decision to relocate to Florida from New Jersey in 2013 troubled investors, leading to the loss of experienced employees and further complications (Lachapelle, 2017).

Restated Finances

A board review of Hertz’s finances revealed that the company had overstated GAAP net income by $87 million for 2011, 2012, and 2013 (Reuters, 2019). To correct these errors, Hertz had to restate its financial results, which led to a 12% drop in share value starting June 2014 (Reuters, 2019). The restatement impacted the reported net income for 2011, 2012, and 2013, reducing it by 18%, 14%, and 6% respectively, resulting in losses of $32 million, $35 million, and $20 million (Basu, 2017).

SEC Investigations

In June 2014, Hertz informed investors of the need to restate three years of financial results due to accounting errors (Administrative Proceeding, 2019). These issues stemmed from poor management, ineffective leadership, and unethical accounting practices, as identified by the SEC (Administrative Proceeding, 2019).

Financial Statement Manipulation

The accounting errors were found to be due to:

• Misstated Financial Information: Hertz’s public filings inaccurately reported pre-tax income due to errors in various business units o