Income Smoothing Case Study

Throughout the case, it can be seen how Cendant Corporation was performing activities that dealt with the interactions of income smoothing. The main cause of performing with Income Smoothing was to make their shareholders and investors believe that they had a professional and ethical operation running. Income smoothing can best be represented as how either gains or losses from a certain period are taken into a good or bad period with losses or no profits. Income smoothing throughout this case was used as an unethical practice performed by Cendant Corporation to achieve financial stability and falsify numbers to make the investors believe they had premium stocks when in reality it wasn’t what was really occurring which would then lead to the

The fraud triangle is made up by three distinguished elements. These elements in the fraud triangle consist of pressure, opportunity, and rationalization. The overall representation of the fraud triangle can be seen as the specific model to spot any type of high-risk unethical and fraudulent performances being conducted by a company, in this case Cendant Corporation. Cedant Corporations actions can be analyzed by the fraud triangle by the way that their senior management/top management decisions fell into the three categories of pressure, rationalization, and opportunity. Cendant Corporation had the pressure to comply with their shareholders and to maintain a stable financial status to prove that they were a profitable organization with a bright company image. Another pressure presented in this case for Cendant Corporation was that for the top management once again. The top management needed to have their financial information seem profitable, therefore pressured the accountant of the company to falsify and “cook the books” to make the financial statements seem actually “profitable” when it wasn’t what It really was. As said in the previous question, income smoothing was used in this case by Cendant Corporation as an unethical practice to make the investors believe that their shares were all bright

It is a basic element that is involved between the two respective individuals in a business relationship. In this case, throughout the unethical performances conducted inside by Cendant Corporation’s top management, trust was broken. Aside from the trust being broken down, corporate governance had its shortcomings as well. EY had faith on the word placed by Cendant Corporation and wasn’t on their mind that they were going to be fooled in such way. Cendant made EY believe that their financial paperwork was complying with GAAP and not in an unethical manner as it was truly seen at the end of the case. This proves that throughout the case, Cendant Corporation wasn’t acting fully ethical nor with the desired fiduciary actions to their investors and the auditing team in this case being Ernst&Young. Aside from the trust being broken apart between both, there was never a sign of an internal control inside Cedant. Therefore, there shows that the corporate governance for Cendant Corporation didn’t have signs of existence as well. Most frauds that were occurring before the implementation of the SOX-2002, had top management such as in Cendant that didn’t have care for the ethical performances as much as in today’s corporate world with more regulations in hand by the government. At the end, Cendant had filings against them concerning their corporate governance