Now that the federal investigation into Computer Associates International Inc.s accounting practices is largely finished, the company hopes to put that dark cloud behind it. But other critical concerns, including a wary Securities and Exchange Commission, the search for a permanent CEO, and ongoing revenue and cost problems, will continue to drag on the once-high-flying software developer.
CA last week struck a “deferred prosecution” agreement with the U.S. Department of Justice and the SEC. In the deal, the Islandia, N.Y., company took responsibility for accounting irregularities, pledged to create a $225 million restitution fund for shareholders and agreed to show its books to an independent examiner for the next 18 months.
CA officials also agreed to cooperate with the governments prosecution of former Chairman and CEO Sanjay Kumar, who pleaded not guilty in federal court in Brooklyn, N.Y., last week to 10 counts stemming from his role in the accounting fraud and subsequent coverup.
The government seeks the return of any ill-gotten gains, plus interest and civil fines, from both Kumar and the former CA senior vice president and head of North American sales, Stephen Richards, who also pleaded not guilty to similar charges last week.
Under the terms of CAs agreement with the DOJ, the company could still be prosecuted if the independent examiner finds further accounting misdeeds. That lack of a clear resolution has at least one CA customer with a “nice piece of change invested” thinking about alternative software providers.
“Until we finish this budget season, we know were going ahead with [CA],” said Randy Cleghorne, director of IT planning and management at the Visiting Nurse Service of New York, in New York. “But for 2005, well re-evaluate what we have invested in them and analyze what it would take to replace them. We dont know if theyre going to change prices [or] pull service and support. If they stay viable, fine. I dont think Ill invest any more in CA.”
Also clouding CAs future is the lack of a permanent CEO. The company has been led by board member Kenneth Cron, acting as interim CEO, since May.
“As long as that interim [CEO] is in place, theres still a perception of flux,” said one large CA user, who asked not to be named. “They need to find that leader, announce who that will be and continue the focus Sanjay brought to the company when he became CEO.”
The end of most of the legal action against the company should help CA in its search for permanent leadership, officials maintained. Chairman Lewis Ranieri in a conference call last week hinted that a decision could come “very shortly.”
“All candidates know the reality of the company. We can now move very expeditiously,” Ranieri said.
Cron said during a conference call CA will “continue to work with the government to ensure CAs compliance with the deferred prosecution agreement. We intend to move swiftly to make corporate governance changes.”
As for executive changes, Cron said, “Change will continue at CA. We are committed to strengthening the management team.”
CA will take additional steps to ensure its accounting practices comply with its agreement, including the appointment of a chief accounting officer, the appointment of two additional independent directors to its board and the creation of a compliance committee on the board.
At the same time, CA is looking to cut costs, including with layoffs that sources say could come as early as next week. At least 1,000 jobs are expected to be cut, according to several sources, some of whom believe it could be double that figure.
“Look at the revenue. A normal software company is in the $300,000- to $400,000-per-employee range. CA is nowhere near that. Theyre more like $200,000. They have to either grow revenue or cut people,” said a former CA executive, who asked not to be named.
Although some issues remain unresolved, other CA customers are more sanguine about CAs future.
“I still get the proper support when I have tech-support issues,” said Jay Levitan, technical services engineer at College of the Holy Cross, in Worcester, Mass. “Im confident they will choose the right person in time.”