The Hertz accounting scandal refers to a set of misstatements Hertz Global Holdings disclosed beginning in mid-2014, which turned out to have inflated the company’s reported pre-tax income by a cumulative $235 million across fiscal years 2011 through 2013. The errors spanned 17 distinct areas of financial reporting, centered on how Hertz accounted for its rental car fleet, and led to a full restatement, a $16 million SEC penalty against the company, enforcement actions against former executives, and shareholder litigation.
How Hertz Overstated Its Earnings
The largest errors involved the vehicle fleet. A rental car loses value every month it stays in service, and that lost value has to be booked as depreciation expense. Hertz reduced the expense it recorded each quarter by stretching out the planned time it kept cars before selling them. During 2013, many of the company’s top models had their planned holding periods extended from 20 months to 24 or even 30 months. Across the U.S. fleet, the weighted average holding period climbed from 21 to nearly 25 months that year.1Securities and Exchange Commission. Order Instituting Cease-and-Desist Proceedings – In the Matter of Hertz Global Holdings, Inc. and The Hertz Corporation
Spreading depreciation over more months lowered the expense in any given quarter and made earnings look higher. Hertz’s quarterly filings during 2013 described routine adjustments based on residual values but never disclosed that holding periods had been extended significantly. The restatement later corrected the omission.1Securities and Exchange Commission. Order Instituting Cease-and-Desist Proceedings – In the Matter of Hertz Global Holdings, Inc. and The Hertz Corporation
A second category of errors involved subrogation receivables, the money Hertz bills to drivers or insurers when a rental car is damaged. Accounting rules require a company to set aside an allowance for the portion of those bills it doesn’t expect to collect. Hertz’s method was flawed: it used a rolling 12-month average of write-offs divided by monthly billed receivables rather than actual collection experience. A spreadsheet error found by internal audit in May 2013 had resulted in no allowance at all being recorded for receivables older than 360 days. Even after the discovery, staff kept applying the same inadequate rate.1Securities and Exchange Commission. Order Instituting Cease-and-Desist Proceedings – In the Matter of Hertz Global Holdings, Inc. and The Hertz Corporation
On at least three occasions in 2012 and 2013, Hertz headquarters directed employees handling those accounts to make post-close adjustments that departed from historical methodology. Each of those adjustments improved reported results by about $1 million.1Securities and Exchange Commission. Order Instituting Cease-and-Desist Proceedings – In the Matter of Hertz Global Holdings, Inc. and The Hertz Corporation
Other corrected areas included the capitalization and timing of depreciation on non-fleet property and equipment, incorrect amortization of vehicle licenses and registrations, and misstatements tied to wrecked vehicles.2U.S. Securities and Exchange Commission. SEC Charges Hertz’s Former Controller for Role in Company’s Accounting Misstatements
Why the Errors Happened
The restatement identified eleven separate material weaknesses in Hertz’s internal controls over financial reporting. A material weakness means a company’s controls have a gap serious enough that a material error could go undetected. Eleven of them at one company points to a systemic breakdown rather than isolated lapses.1Securities and Exchange Commission. Order Instituting Cease-and-Desist Proceedings – In the Matter of Hertz Global Holdings, Inc. and The Hertz Corporation
The SEC’s order described insufficient and inadequately trained financial staff, unclear reporting lines, and the distraction of multiple conflicting business initiatives. Hertz itself acknowledged that “an inconsistent and sometimes inappropriate tone at the top” had contributed to the errors, misstatements, and omissions. In practice, that meant pressure from leadership to meet internal budgets that overrode the accounting staff’s ability to report numbers accurately.1Securities and Exchange Commission. Order Instituting Cease-and-Desist Proceedings – In the Matter of Hertz Global Holdings, Inc. and The Hertz Corporation
How It Came to Light
In May 2014, Hertz filed a Form 12b-25 with the SEC, saying it needed more time to file its first-quarter report and had identified errors in prior periods that could require restating results back to 2011. At that point, the company believed the adjustments for 2012 and 2013 were immaterial.3PR Newswire. Hertz to Extend Filing of First Quarter 2014 Form 10-Q
That estimate did not hold. As the Audit Committee’s investigation expanded, the problems grew well beyond the initial scope. CEO Mark Frissora stepped down during the review, and the stock dropped as investors lost confidence in the reported numbers. The definitive restatement was filed on July 16, 2015, more than a year after the initial disclosure, and included audited corrected figures for 2012 and 2013, audited 2014 results, and unaudited restated data for 2011.4U.S. Securities and Exchange Commission. Hertz Completes Financial Restatement The final total: pre-tax income overstated by $235 million across the affected periods.5Securities and Exchange Commission. SEC Complaint – Securities and Exchange Commission v. Mark P. Frissora
The SEC Penalty Against Hertz
The SEC charged Hertz Global Holdings and its subsidiary The Hertz Corporation with fraud and reporting violations, finding violations of antifraud provisions of the Securities Act of 1933 and reporting, recordkeeping, and internal controls provisions of the Securities Exchange Act of 1934.6U.S. Securities and Exchange Commission. SEC Charges Hertz with Inaccurate Financial Reporting and Other Failures
On December 31, 2018, Hertz settled by paying a $16 million civil penalty and agreeing to cease and desist from further violations. The company neither admitted nor denied the SEC’s findings.6U.S. Securities and Exchange Commission. SEC Charges Hertz with Inaccurate Financial Reporting and Other Failures
Charges Against Former Executives
The SEC charged former CEO Mark Frissora with aiding and abetting the company’s filing of inaccurate reports and with failing to reimburse Hertz for incentive pay as required under Section 304 of the Sarbanes-Oxley Act, which forces a CEO or CFO to return bonus and incentive-based pay received in the twelve months after filings that later have to be restated because of misconduct.5Securities and Exchange Commission. SEC Complaint – Securities and Exchange Commission v. Mark P. Frissora Frissora settled, agreeing to repay Hertz nearly $2 million in incentive-based compensation and to pay a separate $200,000 civil penalty.7U.S. Securities and Exchange Commission. SEC Charges Hertz’s Former CEO With Aiding and Abetting
The SEC also charged former corporate controller Jatindar Kapur with antifraud violations and aiding the company’s reporting failures. Kapur paid a $75,000 penalty along with disgorgement and prejudgment interest, and agreed to a suspension from appearing and practicing before the SEC as an accountant, with the option to apply for reinstatement after two years.2U.S. Securities and Exchange Commission. SEC Charges Hertz’s Former Controller for Role in Company’s Accounting Misstatements
Shareholder Litigation and What Followed
Shareholders filed a federal securities class action alleging they had bought Hertz stock at prices inflated by the inaccurate reporting. That case settled without any monetary payment to the class. Hertz separately sued former members of its management team to recover incentive payments and damages tied to the restatement.
The scandal did not directly cause Hertz’s May 2020 bankruptcy, which was driven by the collapse of travel during the pandemic. But the years of internal disruption, leadership turnover, and reputational damage left the company weaker heading into that crisis.