The Hindu Business Line : How opaque Kumar got kicked, got wild, and got a lifer

Pardon me for internalising that Little, Brown title, How Opal Mehta Got Kissed, Got Wild, and Got a Life. But more than Kaavya's woes with Megan McCafferty, what bothers me is Kumar, who has not only been allegedly kissing goodbye to accounting principles but also to what he had said a few years ago.

`Kumar, Richards plead not guilty,' was the headline of a September 23, 2004, story on www.newsday.com by Mark Harrington. "The fortunes of Computer Associates (CA) International Inc. and its former top executives took divergent turns Thursday, as former CA chairman, Sanjay Kumar pleaded not guilty to criminal charges while the company's stock shares surged," opens Harrington.

And in a report dated April 25 Robert E. Kessler writes: "Kumar, who went from living in a mud-floored home in Sri Lanka to being chairman and chief executive officer (CEO) of CA, pleaded guilty yesterday to orchestrating a massive fraud to keep the firm's stock afloat and lying about his actions to federal investigators." Alas, in matters of accounting, mud slinging is inevitable, more so on someone facing almost a hundred years in prison!

In August 2000, CA promoted Kumar, 38, the COO (chief operating officer), to the post of CEO, to succeed Charles Wang, the founder. Over about a quarter century, Wang had grown CA `from a three-person start-up into the world's fourth-largest independent software company,' as Alex Berenson wrote in The New York Times on April 29, 2001.

"CA is one of the world's largest IT management software providers. Our software and expertise unify and simplify complex IT environments in a secure way across the enterprise for greater business results," informs the company's site www.ca.com. "Founded in 1976, CA today is a global company with headquarters in the US and 150 offices in more than 45 countries. We serve more than 98 per cent of Fortune 1000 companies, as well as government entities, educational institutions and thousands of other companies in diverse industries worldwide."

The site states: "Revenue $3.5 billion in fiscal year 2005; number of employees approximately 15,300 as of March 31, 2005."

CA for `creative accounting'?

CA's revenues five years ago were high. For instance, in the fiscal year ended in March 2000, "CA reported profits of $696 million on sales of $6.1 billion, five times the sales and profits it posted a decade earlier," notes Berenson's article. "It has a market value of $20.3 billion, more than Nike or Lockheed Martin." A mirage, he warned, speaking of CA's `accounting tricks'.

His 3,476-word article, accessible on www.shareholderforum.com, based on the views of `more than a dozen former employees and independent industry analysts', notes that the dubious practices were "so widespread that employees joked that CA stood for `Creative Accounting,' and that March, June, September and December, when fiscal quarters end, had 35 days, giving the company extra time to close sales and book revenue."

It should interest professionals to read CA's annual reports over the years, held in archive on http://investor.ca.com. For instance, year 2000 report spoke of Neugents ii, CA's patented neural network technology. "Neugents allow organisations to deploy intelligent eBusiness applications. They can analyse vast amounts of complex data gathered from every possible resource by Jasmine ii's advanced integration services. For example, Neugents can be used to predict the goods and services that may interest a customer based on everything we know about their history and current interactions."

E&Y's audit report of May 26, 1999, and that of KPMG dated May 10, 2000, gave a clean opinion.

New business model

"What an extraordinary year this has been," exclaimed the 2001 annual report. "First, we changed the way we do business. In a dramatic and progressive move, we switched to a new Business Model that benefits both shareholders and customers." It described the new model thus: "Customers can now license our world-class IT solutions under a subscription-like model. And our customer-focused business model offers incredible flexibility and empowers our customers with more choices than ever before."

Attractive it sounds, but accounting came in the way. "From a financial perspective, this business model impacts our reported financial results, as product revenue is recognised rateably, which means over the life of the contract rather than all at once at the beginning of the contract." The initial impact was `lower revenue and earnings' because cost structure remained the same.

"To help investors better understand the value of our new Business Model, we have created an additional measure — residual value, also known as Deferred Revenue, which represents future revenue streams from committed contracts with the Company," said CA. "In conformity with accounting principles generally accepted in the US," said KPMG in its report dated May 17, 2001. Similar was the report dated May 10, 2002.

Among the archives of news releases on the company's site, you can see a release dated June 26, 2001, challenging the findings of a `customer' survey commissioned by Ranger Governance. `Fundamentally flawed and self-serving research,' said CA.

On December 27, 2001, CA released `Top 10 Virus List for 2001' and warned of `Increasingly Complex Threats in 2002'. One such, perhaps, was the revision by Moody's of CA's senior unsecured long-term debt one notch to `Baa2'. CA reacted thus: "We are disappointed and disagree with Moody's decision, which we believe is not justified by the facts."

Increasingly complex threats

Writing in The Wall Street Journal, Jerry Guidera opined on February 8, 2002, that the rater's move might be a sign of more spats to come with debt issuers. "Analysts interpreted the action by Moody's as part of credit-rating agencies' desire to act earlier rather than later in the wake of the collapse of Enron Corp." On November 25, CA responded to an article in WSJ that day on accounting.

"CA books revenue in accordance with the revenue recognition policies outlined in its public filings with the Securities and Exchange Commission (SEC)," explained the company. "In every case, the revenue for the transactions was booked properly and in accordance with our publicly stated revenue recognition policies."

There was more: "Unfortunately, the reporter's sources are confused by the difference in dates on internal preliminary sales proposal documents and the dates when contracts were signed and all of our strict revenue recognition criteria were met...

"As always we are cooperating the on-going investigation being conducted by the Department of Justice and the Securities and Exchange Commission. We continue to believe that our accounting has been proper."

The next day, that is, on November 26, 2002, Erin Joyce wrote on www.internetnews.com that CA was brushing off new questions. "For months now, the SEC and the US Attorney's office have been looking into how the Islandia, New York-based CA booked revenue in relation to $1.1 billion in compensation for executives. Their bonuses were tied to the company's sales targets and stock price."

A week ago Wang had resigned as Chairman. And the media reported complaints that CA "changed the dates on customer contracts to manage its earnings reports so that it could regularly meet Wall Street's earnings forecasts," as Stephen Taub wrote on CFO.com. "Employees also told investigators that CA bundled `free' software with some maintenance-contract renewals to justify booking more revenue up front than accounting rules permit for maintenance-only deals."

Further study

Catch up on www.sec.gov with the SEC's complaint dated January 22, 2004, against Lloyd Silverstein, a CA executive who had allegedly `participated in a widespread practice that resulted in the improper recognition of revenue by CA'.

Also, the many `litigation releases' on the site. Important read is the 35-page complaint against Kumar (dated September 21, 2004), with an elaborate discussion of accounting fraud and the 35-day month ("because generally most quarters were extended by at least three business days, although some quarterly extensions lasted longer").

It will take long for the current buzz to die down - be it about Kumar reformatting his laptop to run the Linux OS after the authorities began investigations, or about whether Kumar was `more a reformer than a wrongdoer' as his defence used to say in 2004.

A quote in an April 26 story by Harrington on www.newsday.com reads: "The guilty plea `tells me what we knew all along, mainly that this guy [Kumar] was responsible for everything'." Or, was Kumar, after all, a scapegoat in what may be called, `How opaque Kumar got kicked, got wild, and got a lifer'?

http://AccountSpeak.blogspot.com

D. Murali

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