Cendant Sues Auditor in Accounting Scandal

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Membership direct marketer Cendant, New York, has filed suit against Ernst & Young LLP, alleging the Big Six accounting firm failed to detect the false statements in accounting irregularities disclosed last April.

Ernst & Young issued a statement calling the legal claims outrageous and without merit and said that it will bring counter claims against Cendant.

Cendant seeks damages sustained from the irregularities and a contribution to cover the damages brought by a class action lawsuit. The class action, which is still pending, was filed by shareholders after Cendant's stock lost more than half its value following disclosure of the accounting problems. Cendant has agreed in principle to settle a class action suit brought by holders of its Prides securities by raising the market value of securities by $350 million.

Ernst & Young, New York, audited and certified the financial statements that contained the irregularities. E&Y was also the auditor for the former CUC International during the period of 1995-97 when it reported fictitious pre-tax income of more than $500 million in its membership division. The suit alleges that E&Y was negligent in its auditing and violated numerous generally accepted auditing standards.

The accounting firm countered that Cendant's report on the irregularities detailed the "extraordinary efforts of its officers and employees to hide their deceptions from Ernst & Young."

The discovery of fraud and irregularities forced Cendant to restate its results for 1995-97 and resulted in a total net loss of $283.1 million.

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