Risk Management

Eight Years Later, Ex-CFO Sentenced

The onetime finance chief at Network Associates gets a year in prison and a fine for improper revenue recognition and inflating revenue by $622 mil...
Stephen TaubOctober 3, 2008

The former CFO of Network Associates Inc. — now called McAfee Inc. — was sentenced to a year and a day in federal prison for his role in a scheme to falsify financial statements, The San Francisco Chronicle reported. Prabhat Goyal must also pay a $200,000 fine, according to the paper.

In December 1997, Goyal was named Network Associates’s founding CFO and vice president of finance and administration. In late 2000, he was forced to resign, and the company restated its results and changed its accounting methods. The company paid $50 million in 2006 to settle Securities and Exchange Commission charges that it inflated revenue by a total of $622 million from 1998 through 2000.

Goyal was indicted in 2004 for orchestrating the scheme and was convicted in May 2007 on 15 of 20 securities-fraud counts. He allegedly ordered millions of dollars in improper payments that helped mask financial troubles at the software and computer-security company.

As a result of his conduct, Network Associates improperly recorded more than $470 million in revenue and also understated its losses by more than $330 million, according to the indictment.

Goyal was also hit with civil charges by the SEC. According to the complaint, Network Associates oversold products to its distributors, and Goyal oversaw the improper recognition of hundreds of millions of dollars of revenue. More specifically, the complaint alleged that Goyal and others, at his direction, used a wholly owned Network Associates subsidiary to repurchase products previously sold to distributors in order to reduce distributor inventory levels and limit product returns.

The commission also asserted that Goyal made secret payments to distributors to induce them to hold excess inventory and buy more products; that he offered distributors deep discounts and rebates on amounts they already owed Network Associates for prior purchases and from which the company already had recorded revenues; and that he sold products to distributors on consignment, in violation of Network Associates’s written sales contracts and stated revenue-recognition practices.

According to the SEC, Goyal concealed the fraud by directing that payments and discounts to distributors be misrecorded in Network Associates’s books, and by directing the release of unrelated tax reserves to cover payments to distributors and to increase inadequate sales reserves.