Risk Management

Guilty Pleas by Computer Associates Trio

Federal charges stemmed from the company's premature recognition of revenue.
Stephen TaubApril 9, 2004

Three former Computer Associates finance executives, including the former chief financial officer, pleaded guilty yesterday for their roles in the software giant’s accounting scandal.

Former CFO Ira Zar pleaded guilty to conspiracy, securities fraud, and obstruction. David Rivard, former vice president of finance, and David Kaplan, former division vice president of finance, each pleaded guilty to one count of conspiracy to commit securities fraud and one count of conspiracy to obstruct justice.

According to wire service reports, Zar faces up to 20 years in prison, and Rivard and Kaplan face up to five years in prison and a fine of up to $250,000 on each of the two counts. In addition, the trio settled civil fraud charges with the Securities and Exchange Commission.

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All three are cooperating with the government, said Assistant U.S. Attorney Eric Komitee, according to Reuters. Bloomberg reported that Zar has implicated unnamed “high-level” Computer Associates executives in the fraud, and that Rivard said he conspired with “employees senior to me.” Referring to the pleas, former U.S. Attorney Stanley A. Twardy Jr. added, “I don’t think it bodes well for senior management,” added Bloomberg.

Sanjay Kumar, the chairman and chief executive officer of Computer Associates, and Charles Wang, the former chairman, have not been charged with any wrongdoing.

Zar, Rivard, and Kaplan were accused of engaging in a scheme to book sales after a quarter ended by altering the paperwork. “I signed agreements which I knew had been backdated by customers, and I also backdated my own signature” on documents, Rivard told the judge, according to Newsday. In a statement to Glasser, added Newsday, Rivard said he learned of accounting improprieties at CA shortly after joining the company from accounting firm Ernst & Young in 1998. “I should have quit,” he said, according to Newsday. “I sincerely regret not doing that.”

Outside the courtroom, Assistant U.S. Attorney Michael Cornacchia told reporters that the pace of the government’s case “has taken a rapid turn.” According to Newsday, Cornacchia added that the government’s case now has evidence that the securities fraud conspiracy took place at least “from 1998 to the end of 2000.” In October, Computer Associates said the improprieties took place primarily during fiscal 2000. The practices “were ongoing when [Rivard] got there,” in 1998, said Cornacchia, according to the Long Island newspaper.

The SEC’s civil charges alleged that Zar, Rivard, and Kaplan participated in a widespread practice to prematurely recognize revenue in the March 2000 fiscal year. According to the complaint, the company prematurely recognized over $1.4 billion in revenue from at least 116 contracts that the client or the company signed after the quarter close.

The commission alleged that Zar helped orchestrate the company’s improper revenue recognition by directing the improper extensions of fiscal quarters, by overseeing the preparation of quarterly and annual reports while aware that those filings reported revenue improperly under GAAP, and by backdating his own signature on a large customer contract and authorizing the backdating of other contracts.

Rivard, alleged the SEC, allowed the company to record revenue from contracts in prior quarters while aware that the contracts were executed later, knew that customers were backdating signatures on contracts, and backdated his own signature on some contracts. Kaplan, asserted the commission, oversaw the preparation of the company’s financial statements for inclusion in its financial filings while aware that those statements included revenue from backdated contracts in violation of GAAP. All three individuals misled the company’s outside auditors regarding the existence of the “extended quarters” practice, the SEC also alleged.

Without admitting or denying the allegations, Zar, Rivard, and Kaplan each consented to a permanent injunction and to be barred from ever serving as an officer and director of a public company.