Its not every day that a major corporation offers to pay $10 million in greenmail to encourage prompt settlement of a federal investigation. But that is what Computer Associates International seems to be doing.
At first glance it may seem quite laudable that CA wants to make a clean breast of its accounting misconduct by seeking a deal with the government. Doing so would allow the company to restore a smidgen of luster to its badly corroded image and let it turn its full attention to growing the business.
But its premature to make an offer, since so far the government hasnt said officially whether it intends to charge CA for violating any accounting or securities regulations. Individual former executives have been charged as a result of the investigation, but not the company itself.
Setting aside a $10 million reserve for a potential legal settlement is a routine and prudent accounting measure for a lot of companies. Its also a blatantly public way to signal that you are highly motivated to make a settlement. But it will do little to help the companys negotiating position. The government may have a very different opinion about whether $10 million is an adequate settlement for accounting misconduct that dates back years.
CAs settlement offer only raises new concerns about what other disclosures may still be in the offing. It seems highly unlikely that the Securities and Exchange Commission would be so accommodating as to accept any settlement before it finishes examining CA books under a microscope. Only then can it consider what charges or penalties would be appropriate.
Right now the cards are all in the federal investigators hands. While the current status of the SEC probe is unclear, the investigation has already resulted in guilty pleas from three former senior CA executives on fraud conspiracy charges. Its still quite possible that the SEC probe could produce additional indictments of other current and former CA executives.
The company fired nine other executives in April shortly before the CA board of directors ousted former chief executive Sanjay Kumar, who remains with the company as chief software architect. The SEC could find CA as a whole or any of the disciplined executives from Kumar on down liable for prosecution.
CA PR offensive
Making a pre-emptive offer is not likely to sway federal prosecutors, who have been highly aggressive in prosecuting accounting fraud charges against companies such as Enron, WorldCom and Tyco International.
While the charges levied against CA havent been on the brazen scale of these other companies, the results could be similar—new indictments, trials, guilty pleas, fines and perhaps even prison terms.
The settlement disclosure has been part of a public relations offensive by CAs top management to assure customers, shareholders and the government that the company is on its way to repairing the damage.
CA disclosed the settlement offer on May 25 along with its fiscal fourth-quarter financial report. CA had delayed the release of this report for two weeks because the company said its accounting staff (presumably decimated after the firings) was overburdened by having to restate earlier quarterly reports after an investigation by the board of directors audit committee found irregularities.
As part of its quarterly report, CA also disclosed that it has will adopt a more conservative accounting policy for the way it recognizes revenue generated from subscription software sales reported by indirect distributors.
CA will spread the booking of these sales over time rather than recognizing them all at once. This was the crux of the SECs investigations: that CA was overstating revenue because it was booking software sales before customers actually paid the bills. The company estimates that this policy will cut its net income by about $125 million, equal to 13 cents a share.
The company also says it will start reporting stock options as expenses, which will further reduce 2005 income by about 4 cents a share. This is a move that many companies have tenaciously resisted unless forced by adamant shareholders.
Meanwhile, Cron is acting more like a permanent rather than an interim CEO as he makes the rounds of customers and partners to convince them that he and the board are keeping a tight rein on the companys financial and sales policies.
All of this is designed to demonstrate that CA is going to be a good corporate citizen from now on. But the company is still likely to feel some more jarring bumps along the road to respectability. The SEC may decide it is going to cost a lot more than $10 million before CA is finally allowed to put years of shady dealings behind it.
eWEEK.com Enterprise Applications Center Editor John Pallatto is a veteran journalist in the field of enterprise software and Internet technology.