Accounting & Tax

Computer Associates Offers Settlement

''Add another zero and this becomes a serious offer,'' says one observer.
Stephen TaubMay 27, 2004

Computer Associates International offered to pay $10 million to settle federal accounting and obstruction investigations, according to published reports. The government has not yet responded.

Chief financial officer Jeffrey Clarke revealed the offer at the company’s user conference in Las Vegas. He noted that the company even recorded an expense for the potential settlement in its March 31 quarterly results released Tuesday, according to Bloomberg.

“Add another zero and this becomes a serious offer,” Bernard Black, a Stanford University law professor, told Bloomberg. “Given the scale of the accounting mistakes, it’s hard to see that this makes a dent. I’m puzzled.” Note that WorldCom shelled out $750 million as part of its settlement with regulators for its accounting fraud.

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Computer Associates also announced that beginning in the second quarter of fiscal 2005, it will change the way it accounts for revenue from sales through partner companies. This will result in a reduction in its previously released earnings per share guidance for fiscal 2005 by 13 cents a share, according to Newsday.

If CA had deferred indirect sales from its fiscal 2004 results, it would have lowered revenue by approximately $70 million, Clarke told the paper. Asked why the company was changing its model now, Clarke added, “It’s important now that we include it because it’s material in size and we are changing the contracts.” The changes will not affect cash flow, only the timing of revenue recognition, the paper noted.

The company also announced that next year it will begin treating employee stock options as an expense, which will lower the earnings-per-share guidance by another 4 cents, Newsday added.

CA also restated its results again for the second and third quarters of 2004, reducing revenue by $5 million and $7 million respectively because of a change in the way it recognizes renewed contracts under its deferred subscription model, according to the paper. The company also reportedly said it would lower first-quarter 2004 results by $3 million to reflect the change. CA had previously said the changes would work out to approximately $9 million, compared with the now-updated $12 million.