Auditing

Ernst & Young Sued for Its Audit of CA

Sam Wyly asserted that he relied on E&Y's audit when he decided to sell Sterling Software to Computer Associates.
Stephen TaubFebruary 16, 2005

Sam Wyly, who twice launched proxy fights to replace several board member of Computer Associates International Inc., is suing the embattled software giant’s former auditor, Ernst & Young, according to The Wall Street Journal.

In a lawsuit filed in Texas District Court in Dallas, Wyly asserted that he relied on Ernst & Young’s audit of the company when, in March 2000, he decided to sell Sterling Software to Computer Associates for about $4 billion. E&Y also was Sterling’s auditor at the time of the transaction.

About one month later, reported the Journal, CA’s share price plunged about 12 percent when the company delayed reporting its full-year earnings, and later in the year it dropped further when CA failed to meet its projected earnings forecast.

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Computer Associates subsequently became embroiled in a $2.2 billion accounting scandal that led to the indictment of its former chief executive, Sanjay Kumar, and resignations and indictments of other top executives. The company later acknowledged that between 1998 and 2000, the company routinely kept its books open a few days after quarter-end so it could meet revenue and earnings expectations.

Wyly is seeking at least $80 million in damages, according to the Journal. He alleged that auditing deficiencies by E&Y helped lead to a high valuation of Computer Associates stock and to his accepting inflated CA stock in exchange for his stake in Sterling Software, the paper added.

CA fired Ernst & Young in June 1999, replacing it with KPMG LLP.

A spokesman for Ernst & Young told the Journal that the firm couldn’t comment because it hadn’t seen the suit.