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For far too long, Computer Associates International Inc. has been the poster child for poor corporate governance and accounting fraud in the IT industry.
The company has been dogged by an unending saga of lawsuits, proxy fights, federal investigations, executive firings, resignations and retirements–all of it revolving around the honesty of its accounting practices and the integrity of its top management.
These travails are a product of a corporate culture, engendered from the very top, that required Computer Associates to function behind an elaborate web of accounting camouflage and deception.
A simple, honest statement of revenue and earnings seems to be beyond CAs top brass. CA repeatedly has been charged with booking revenue before it is actually realized.
This isnt an uncommon violation in the software industry. Many IT companies have had to restate earnings because financial executives, worried about their jobs, stock options and salary bonuses, padded quarterly earnings with chimerical revenue from sales deals that wouldnt actually be closed and paid for until later quarters.
But at CA, it seems that such behavior is institutionalized, chronic and pervasive because it keeps happening even after earlier violations caused so many legal and management problems.
The firings this week of nine employees from its finance and legal departments after a board of directors audit committee investigation show that the company hasnt learned any lessons from its previous experiences.
The firings came little more than a week after three former senior CA financial executives pleaded guilty to federal charges of securities fraud conspiracy and obstruction of justice. Again, the main allegation in this case was that the company held open its books after the quarter ended to record sales contracts that customers hadnt actually signed and sealed. The conspirators even preprinted contract forms dated on the last day of the quarter.
Now, former CA chief financial officer Ira Zar faces as many as 20 years in prison, and former senior financial executives David Rivard and David Kaplan face as many as 10 years in prison for their part in the fraud conspiracy.
The latest firings will trigger a new cycle of restated earnings and federal investigations that could produce additional fraud charges and conspiracy indictments. All of this will further erode the companys credibility with customers and financial markets. The investigations will distract CAs management from its main mission of producing and selling enterprise software for even more months to come.
Its not just the careers and reputation of top CA management that are at stake. The companys survival as a going concern is in the balance.
Next Page: Customers and investors believed that Kumar would set a new course.
Setting a New Course
It is astonishing that—after the prolonged turmoil that resulted in the retirement of CA founder Charles Wang in late 2002 and his replacement as board chairman by Sanjay Kumar—the company utterly failed to make fundamental changes to its corporate culture and accounting practices.
When he became chairman, customers and investors believed that Kumar, who joined the company in 1987, had the experience and credibility to set a new course for the company while staying close to its technological roots. Kumar restructured CAs product line, selling off its application-software holdings and concentrating on IT management and security systems.
But apparently, he didnt keep a tight rein on CAs accounting practices, and for that, he deserves to lose his job. He had to know that federal authorities and investors would keep CAs financial statements and its corporate conduct under a microscope. His failure to ensure that CA accounting procedures were conducted according to the highest standards is inexcusable.
While the board of directors appears to be doing its job by ferreting out the latest instances of accounting misconduct, it shares the blame by failing to ensure that its accounting practices were honest to begin with.
The best way for CA to recover at this point is to bring in a highly effective outsider with no connections to the old culture who is prepared to make whatever changes are necessary to keep the companys accounting practices honest.
Appointing another insider–a product of the entrenched culture of fraud and deception–will call into question whether CA is serious about reforming its finances and capable of any semblance of corporate integrity.
There is yet another basic question that has to be answered: whether CA can actually function and survive as an independent, profitable company without doctoring its books quarter after quarter.
Future events may prove that successive generations of CA financial managers felt compelled to resort to fraud because without such shenanigans the company would have collapsed years ago.
In that case, the task of any new chief executive will be to sell off the company and its technology holdings to realize the best shareholder value and for the good of the software industry.