Risk & Compliance

Finance Execs Resign from Computer Associates

Revenue recognition is at the heart of the issue. Also: SEC settles charges with Enron's former chief accounting officer; FASB delays rule on off-b...
Stephen TaubOctober 10, 2003

Computer Associates’ CFO and two other finance executives have stepped down in the wake of a brewing accounting scandal.

The executives—Ira Zar, the finance chief; Lloyd Silverstein, senior vice president of finance; and David Rivard, vice president of finance—resigned at the request of Sanjay Kumar, the computer giant’s chairman and CEO. Kumar’s request followed a report by CA’s audit committee on its probe into the company’s timing of revenue recognition in the fiscal year ending March 31, 2000.

CA’s accounting practices are currently being jointly investigated by the United States Attorney’s Office for the Eastern District of New York and the Securities and Exchange Commission. The audit committee’s inquiry is a response to the government investigation, the company acknowledged.

In its continuing probe, the audit committee found “that CA recognized certain revenue prematurely in the fiscal year ending March 31, 2000,” said Walter P. Schuetze, the committee’s chair and a former SEC chief accountant.

Some software contracts signed in that year seemed to have been signed after the end of the quarter in which revenues associated with them had been had been recognized, according to Schuetze. “Those revenues should have been recognized in the quarter in which the contract was signed,” he added. The committee, however, found no evidence “that the revenues and cash flows associated with these contracts were not genuine. The contracts were valid, products were delivered and cash was received.”

In October 2000, CA started to book revenues over the life of the company’s software licensing agreements. Before that, the revenues of entire contracts had been booked when the contracts were signed.

While the company searches for a new CFO, Douglas Robinson, senior vice president of finance, will serve as finance chief. Robinson joined the company in 1989. Before joining CA, Robinson served as the CFO of Cullinet Software.

SEC Settles Charges with Enron’s Former Chief Accounting Officer

The SEC had settled securities fraud charges with the former chief accounting officer of Enron North America (ENA).

Without admitting or denying wrongdoing, the CAO, Wesley Colwell, agreed to pay $500,000 — $200,000 in penalties and $300,000 in disgorgement. He also agreed to be barred from serving as officer or director of a public company, the SEC said.

As part of the settlement, Colwell will continue cooperating with ongoing investigations into Enron by the SEC and the U.S. Department of Justice Enron Task Force.

Together with others at Enron, Colwell “engaged in a wide ranging scheme to defraud by manipulating Enron’s publicly reported earnings through a variety of devices designed to produce materially false and misleading financial results,” the commission said. “This scheme included the misuse of reserve accounts, concealment of losses, inflation of asset values, and deliberate use of improper accounting treatment for transactions.”

For the year 2000, for instance, Colwell and others deferred over $400 million of earnings into reserve accounts within ENA, the SEC charged. During the first and second quarters of 2001, Colwell and others used ENA reserve accounts to mask over $1 billion in losses associated with Enron’s retail energy business, Enron Energy Services (EES), the SEC alleged.

When Enron needed earnings in the third quarter 2001, Colwell and his associates released over $200 million of previously deferred trading profits from ENA reserve accounts, according to the charges.

The SEC’s complaint also charge Colwell and others with manipulating the value of a big Enron’s asset, Mariner Energy Inc., and improperly avoiding a write-down associated with the disposition of Houston Pipeline Company, an Enron subsidiary.

FASB Delays Rule on Off-Balance-Sheet Consolidation

The Financial Accounting Standards Board (FASB) delayed a new rule that would require companies to consolidate off-balance-sheet entities onto their own financial statements, according to Dow Jones. (For in-depth coverage of off-balance-sheet financing, see our January special report.)

The rule, FIN 46, was slated to go into effect in the third quarter.

Now, however, companies won’t need to follow the rule until they file financial statements for the period ending in December.

FASB has received many comment letters from companies in the last two weeks asking for a deferral, according to a Dow Jones report citing Robert Herz, FASB’s chairman.

FASB issued FIN 46 in January to prevent companies from using off-balance-sheet partnerships or other special-purpose entities to hide debt and inflate profits, as Enron is alleged to have done in particularly aggressive fashion.

The rule reportedly requires companies exposed to the majority of losses from off-the-books entities to consolidate the entities’ assets and liabilities into their own financial statements.

FIN 46 would require banks and other finance companies to put $500 billion of assets and liabilities on their books, according to an estimate in the Dow Jones story.

Interestingly, Ruby Tuesday Inc. knew the delay was coming. On Monday, the company said in a press release it would delay implementing FIN 46 precisely because FASB proposed a delay in the effective date of FIN 46 for certain types of variable-interest entities, including franchisees.

“The company believes it would not be prudent to adopt FIN 46 prior to issuance and review of the final guidance, as it is possible there could be further, unexpected modifications to FIN 46, including modifications that might lead the company to conclude some or all the franchise partnerships should not be consolidated,” the company stated at the time.

Practically everyone involved in preparing corporate financial statements “will welcome some more time to try to better understand and analyze the impact of FIN 46,” Jim Mountain, a Deloitte & Touche partner, told Dow Jones. “It’s a very complicated standard.”

Short Takes

  • Sears, Roebuck and Company, whose stock has more than doubled since hedge fund manager Edward Lampert became its largest shareholder late last year, said it will spend $3 billion to buy back its shares.
  • Embattled Eastman Kodak Company sold $500 million of 7.25 percent 10-year senior notes and $500 million of 3.375 percent convertible senior notes in private placements. The 10-year notes were priced to yield 7.265 percent. The convertibles have a term of 30 years, with a right by the company to call them on or after seven years and a right by holders to put their notes at various times on or after seven years. They are convertible into Kodak common stock at a price of $31.02, equal to a conversion premium of about 47 percent, based on the closing price of $21.10 on Oct. 7.

The proceeds from the offerings will be used to repay part of Kodak’s commercial paper borrowings and to partly fund Kodak’s announced acquisition of PracticeWorks, Inc.

  • JetBlue Airways Corp., which earlier this week announced a 3-for-2 stock split, also filed a shelf registration to sell up to $750 million in debt securities, stock, and pass-through certificates. The proceeds will be used to fund working capital and for capital expenditures, the company said.
  • Harvey Wagner resigned as CFO of Mirant Corporation less than a year after joining the bankrupt energy trader. The company said the 62 year-old would stay on in an interim capacity until a replacement is hired. “Harvey believes that at this important time in Mirant’s restructuring process, the company deserves to have a CFO capable of making the necessary commitment to see it emerge from Chapter 11 as viable and strong,” Marce Fuller, the company’s president and chief executive said. “Since he is in the latter stages of his career, this is a commitment he cannot make.”
  • FreeMarkets Inc. CFO Joan Hooper resigned to join Dell Inc. as a vice president of finance. FreeMarkets said controller Sean Rollman will take on Hooper’s finance responsibilities until a replacement can be found.
  • Texas Capital Bancshares, the parent company of Texas Capital Bank, named Peter B. Bartholow as finance chief of both entities. He will oversee the finance organization and investment activities. Bartholow will also supervise funding initiatives, including BankDirect, the bank’s Internet banking division. Further, we will manage relationships with Wall Street and the investment community.

The company said Bartholow’s appointment would allow Greg Hultgren, an executive vice president who had been serving as both CFO and chief operating officer since the bank’s inception, to focus solely on operations. Bartholow most recently served as a managing partner of Hat Creek Partners, a Dallas-based private equity firm.

  • HealthSouth Corporation said William Owens, one of five former company CFOs who pleaded guilty to accounting fraud, resigned from the board. Owens was fired after he agreed to plead guilty to fraud charges on March 26.