Efforts by Computer Associates International Inc. to be seen as both a technology vendor and a trusted partner are in peril after a week of scandal-driven turmoil culminating with the companys top executive being stripped of his leadership position.
The board of directors removal of Sanjay Kumar from his roles as chairman and CEO also robs CA of the most public face of what many users considered a renaissance at the company. As a trio of investigations into accounting practices inches closer to Kumar himself, once-confident CA customers are expressing reservations about dealing with a vendor with damaged credibility.
CA officials announced last week that Kumar had stepped down from the CEO spot and resigned from the board. In a move still being questioned internally at CA, according to sources, Kumar was given the newly created position of chief software architect. Lewis Ranieri, lead independent director on the board, was elected chairman of the board for the Islandia, N.Y., software company.
CA officials said that a search is on for a replacement for Kumar and that an interim CEO will be named.
According to sources close to the situation, CAs board late last week offered the interim CEO position to fellow board member Kenneth Cron, former CEO of Vivendi Universal Games. Insiders say that a permanent CEO will almost certainly come from outside CA and that the board could start making preliminary contacts with candidates as soon as this week.
Employees at CA said the executive changes—including Kumars demotion—have been expected for some time. But many expressed surprise that the board allowed Kumar to remain at the company, even if only in an ill-defined, largely ceremonial role.
One employee said that many at the company had expected Kumar to be fired outright and that the prevailing sentiment inside CA is that Kumar is unlikely to stay on long, regardless of the outcome of two separate and ongoing investigations being conducted by the Securities and Exchange Commission and the Department of Justice. “Everybody is expecting more changes. This is not the end of this,” said the employee, who requested anonymity. “The fact that [Kumar] is still here is the shocker, not his resignation.”
Some CA customers said the accumulation of the accounting scandal, the executive reshufflings and the continued denials of wrongdoing from senior management has shaken their faith.
“After reviewing the information released about the accounting procedures and issues with CA executives, I have thoughts of Enron [Corp.]. It appears that top executives believe that they are impervious to scrutiny and are above the law,” said Chuck Slenker, systems engineer at Hartford Hospital, part of Hartford Healthcare Corp., in Hartford, Conn., and a large CA customer.
“Unfortunately, these executives dont realize the effects their actions have on the customers, employees and companies that employ them. The products that CA makes and we use, I feel, have not been affected—only the trust in the company itself,” Slenker said. “Since we have invested thousands of dollars in the products that CA makes, I can only be reminded what was the outcome of Enron. I hope that situation does not happen, but you still think about it. It makes you wonder what happened to the morals and ethics people used to have in business.”
Such feelings are not lost on those still tasked with selling CAs products. “A reseller told me less than a month ago he still has to pull CA products out [of new software contracts] because certain customers would demand that. If thats still going on, its more than a little bit of disagreement,” said one source close to CA, who asked not to be named.
Following Kumars exit, some customers are contacting CA for an explanation. Gabriel Zaldivar, network engineer for San Francisco-based Pacific Maritime Association, said he called the company as soon as he heard the news from another vendor.
Zaldivar said he believes CAs credibility has taken a hit. “If the [chief financial officer] is going to plead guilty because of accounting fraud, then I can start getting some doubts about CA,” he said. His primary concern, however, is whether CA can continue its focus on the development of new software and innovation to combat high prices, he said.
“It will be a good chance for CA to prove that they can correct the path, and they can start doing things right again, and we wont see what happened to Enron or what is going on with Tyco [International Ltd.] at this time,” Zaldivar said.
Zaldivar said he expects storage companies such as EMC Corp. and Veritas Software Corp. to make a pitch for PMAs technology business while CA deals with internal struggles.
Such competitive pressure comes at an especially inopportune time in CAs new user-focused efforts. “CA is at a critical juncture. They have begun to turn perceptions around, but that is tentative because of past behavior. They must continue down that path of changing perception,” said Corey Ferengul, an analyst with Meta Group Inc., in Chicago. “Their survival is dependent on upselling to existing clients.”
“Im just hoping that with these developments, and any more bad news for the company, that they dont get distracted,” said Jay Levitan, technical services engineer at College of the Holy Cross, a CA user, in Worcester, Mass. “We still have confidence in them, but if things higher up [in the organization] change and that filters down, we might have to re-evaluate.”
More bad news could come from personal or corporate indictments. The DOJ (through the U.S. Attorneys Office for the Eastern District of New York) and the SEC are conducting ongoing investigations of CA. Both agencies have brought actions against former employees on charges related to accounting fraud, but only the DOJ can prosecute criminal charges.
Earlier this month, former CA CFO Ira Zar pleaded guilty in the U.S. District Court for the Eastern District of New York to DOJ charges of securities fraud conspiracy, substantive securities fraud and obstruction-of-justice conspiracy. Zar faces a maximum 20-year sentence. At the same time, David Rivard and David Kaplan, two former senior financial executives, pleaded guilty to securities fraud conspiracy and obstruction-of-justice conspiracy. Each faces a maximum of 10 years in prison.
Also this month, the SEC filed civil actions against Zar, Rivard and Kaplan, charging them with accounting fraud. Without admitting or denying the charges, the three agreed to a permanent bar from acting as officers or directors of publicly held companies. The SEC is still pursuing the litigation, seeking monetary penalties and requiring Zar, Rivard and Kaplan to “disgorge their ill-gotten gains.”
In January, the SEC filed charges against Lloyd Silverstein, a former senior vice president of finance at CA. Internal auditors are examining the companys books and are expected to announce their findings in the next few weeks.
Still, there are those who are reacting to the turmoil without missing a beat. “If you take the worst-case scenario and CA were to go away forever, someone would pick up eTrust Access Control, and wed continue to use it,” said Sorrel Jakins, chief engineer for applications infrastructure at Brigham Young University, in Provo, Utah. “We dont see this as the end of the world, except for Sanjay.”
Additional reporting by Dennis Fisher and Brian Fonseca
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