Computer Associates Under SEC Probe
Federal authorities are trying to determine whether Computer Associates International Inc. wrongly booked more than $500million in sales in its 1998 and 1999 fiscal years as part of a plan to enrich senior managers, The Wall Street Journal reported Monday.
News of the investigation by the Justice Department and the Securities and Exchange Commission sent the company’s shares falling 2.1%, or 36 cents, to $17.20 in trading Monday on the New York Stock Exchange.
The company continues to believe it acted appropriately, said spokeswoman Denise DesChenes. SEC spokesman John Nester declined to comment.
Increasing sales was a factor behind Computer Associates’ rising share price in the late 1990s, the Journal reported, citing sources it didn’t identify. In May 1998, the company’s three top managers, Chairman Charles Wang, Chief Executive Sanjay Kumar and head of research Russell Artzt, received a stock award worth about $1 billion because the shares reached a trigger price of $55.13, the report said.
Now investigators want to know whether the company overstated sales for the period immediately preceding and following the stock grants. Investigators are looking into the company’s move in May 2000 to shave $1.76 billion, or more than 10%, from revenue reported in the previous three fiscal years, the Journal said.
In 2000, on the advice of the company’s auditor, Computer Associates changed the way it classified expenses and revenue, DesChenes said. KPMG replaced Ernst & Young as the company’s auditor in June 1999. Ernst & Young has been subpoenaed by the SEC. KPMG has declined to comment on whether it has been subpoenaed.
“This change in presentation had no impact on reported earnings, earnings per share or cash flows,” DesChenes said. “Additionally, this had no material effect on CA’s historical revenue growth trend for the five-year period 1996-2000.”
The company shifted to a new method of booking sales in October 2000. The one used in 1998 involved selling multiyear software licenses, booking the full amount, then renewing contracts before the term of the initial contact expired, Merrill Lynch & Co. analyst Peter Goldmacher has said. The system left overlapping revenue.
Now the firm uses shorter contracts and books them each month, pro-rating the total cost monthly.
