Accounting probe keeps CA under a cloud, CEO says

Until the government completes its investigation of Computer Associates International Inc.’s past accounting infractions, the company will continue operating under a cloud, chairman and chief executive officer Sanjay Kumar acknowledged Wednesday during CA’s quarterly meeting with analysts.

CA’s management team focused its presentations on a broad overview of the company’s market positioning, but the first question from attendees during a discussion period concerned CA’s accounting problems. An analyst asked whether CA’s top management knew or should have known about the company’s illegal accounting maneuvers.

Several government agencies and CA’s own board are conducting investigations of the company’s accounting in the late 1990s. Three top financial executives, including CA’s chief financial officer, resigned in October after preliminary results from the board inquiry showed that CA booked some sales prematurely during its fiscal year ended March 31, 2000. One of those executives, former senior vice-president of finance Lloyd Silverstein, pleaded guilty last month to accounting fraud and told investigators of a “widespread practice” at CA of booking revenue from software contracts before the deal was signed.

Kumar, who took over as CA’s CEO in August 2000, served as the company’s president and chief operating officer during the stretch of time in which the improper accounting took place. Without offering details, he defended his conduct as a company executive.

“I don’t think it’d be fair for me to get into all the facts, given that there is an outstanding investigation,” he said during Wednesday’s meeting. “You’re looking at the person who advocated the new business model. You’re looking at the person who went to the board and said, ‘We have to come up with a better way to run this company.’…I believe my actions have been proper with respect to this matter.”

CA adopted in November 2000 a new business and accounting model that focuses on selling software by subscription and recognizes revenue gradually throughout the life of a contract, rather than all at once as a deal is signed. The new model made comparisons to prior periods difficult, but provides greater stability and transparency, company executives said. By the end of last quarter, more than 60 per cent of CA’s revenue came from subscriptions, acting CFO Doug Robinson said.

While analysts are generally comfortable that CA’s current accounting practices are aboveboard, questions remain about how penalties for its past actions will affect the company — and about how much accountability for those actions will ultimately attach to entrenched executives such as Kumar. CA received last month a “Wells Notice” from the U.S. Securities and Exchange Commission (SEC), an indication the SEC is likely to bring a civil enforcement action against CA.

“We recognize that (the penalties) can be serious for a problem like this, but we’re hopeful we’ll resolve the problem in a positive way,” Kumar said at the meeting.

CA executives spent the bulk of the meeting outlining the markets in which the company competes and its position in each. Officials see their company as dominant in the management software market, gaining in the security software sector, edging up on storage vendors Veritas Software Corp. and EMC Corp., and trailing IBM Corp.-owned Rational in the application and data lifecycle management market.

Developer tools have a reputation of being the neglected element of CA’s product portfolio — employees in that group consider themselves “the great unloved,” according to sales and field operations head Stephen Richards. To fix that, the company wants to more tightly integrate its tools with its other software offerings.

Such a move fits in with CA’s overall push to sell more complete software sets to its core customers, Kumar said.

“People are looking for one integrated, complete solution,” he said. “The management-software umbrella (is) an important concept for us in the future.”

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Jim Love, Chief Content Officer, IT World Canada

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