Making(Up)Numbers 167generate drevenue through membership dues. On average, member-
ship clubs like these earn greater profits from long-term members
than from short-term members. Indeed, the tendency is to make zero
profit from members enrolle dless than a year because they are typ-
ically entitle dto a cancellation refun dof dues.
As early as 1989, CUC met with some accounting embarrassment
for its practice of recognizing as revenue the total amount of each
membership payment in the perio dit was receive dwhile expensing
amounts allocable to each membership over a three-year period. In
bookkeeping terms, it debited revenue while crediting both an ex-
pense account an dsome liability account, a mismatching that
booste dreporte dearnings.
Although CUC retreate dfrom that position after harsh criticism
by financial analysts an dothers, it continue dpracticing aggressive
accounting in other areas. Chief among these practices was its re-
porting technique for membership flow an dannual renewal rates—
important information for gauging company prospects given that
newer members contribute little or nothing to the bottom line while
the real value is in long-term members.
Among new members enrolle dat the en dof a given year, 70%
renewed, but the way CUC reported this in its disclosure made it
seem as if 70% of all members who joined during the year renewed.
Thus, if 100 members were in an dout during the year but 10 re-
maine dmembers at year en d, the 70% figure meant that 7 renewe d
even though it looke dlike 70 renewe d—a tenfol d difference in the
company’s prospects.
This misleading disclosure represents only one egregious exam-
ple of numerous irregularities at the company, as a subsequent $2.8
billion settlement of an investor lawsuit an da forensic accounting
report later made clear. The report emphasized that these practices
manifeste dan overall culture of pernicious accounting practices.
Others included manipulating books relating to the percentage of
refundable membership dues, cash management, and even how the
merger between CUC an dHFS that create dCen dant was accounte d
for.
CODA
Aggressive or irregular accounting is not a sign of business promise.
The trouble is, it is often hard to detect. Buffett quipped: “It has