Professional Documents
Culture Documents
GROUP E (6)
(CASE REPORT ANALYSIS OF A LETTER FROM PRISON)
GROUP MEMBERS:
LECTURERS NAME:
PN ROHANA @ NORLIZA BT YUSSUF
SUBMISSION DATE:
22 SEPTEMBER 2015
Executive Summary:
Computer Associates has a sales-driven-culture which is the more
you sell, the more commissions you will get. Richard was the head of Sale
Department and his responsible to keep an eye on things like when the
contract are signed and when those payments are assured. The highlighted
problem was the action account department has taken was not following the
GAAP and the issue about ethics. To the word of Richard himself, this way of
accounting was not a really big deal like the WorldCom bankrupt or Enron
bankrupt. He is also very confident to continue developing his career in the
future after he got out of jail. However, to overcome the problems Computer
Associates must use the suitable accounting policies, establish corporate governance
structure and emphasize internal control on their management and financial report.
1.0 INTRODUCTION
The Generally Accepted Accounting Principles (GAAP) was required to
be met in order for revenue associated with a software license agreement to
be recognized. Computer Associates accountant must follow the GAAP as the
action that had been taken was not following this accounting principle.
Besides that, ethics also very important in Computer Associates as it concern
an individual's moral judgments about right and wrong. Decisions taken
within an organization may be made by individuals or groups, but whoever
makes them will be influenced by the culture of the company. Therefore,
Richards, Ira Zara and other six executive must be more ethical their works as it give impact to
CA. Besides that, ethical behavior also can prevent the company be an unethical in giving
incentive which is commission that was base on sale. In order to overcome the issues of the
problem facing by the Computer Associates we need to analysis the problem and prepared
with
the
best
solution
to
suit
their
problems.
and Australia office after two years. In 1995, he becomes senior vice president of Pacific region.
In April 1999, he was promoted to lead on of Computer Associate North American. In April
2000, he promoted to global head of sale.
In July 2000, CA announces that it financial result is lass that current Wall Street
estimate. The problem is unexpected shortfalls in revenue. The investigation starts by
Department of Justice (DOJ) and Security and Exchange Commission (SEC). When attorney and
forensic accounting checks the employee computers, they found that twenty-three boxes of
document were originally missing. They found that CFO, Ira Zar have backdating some of the
contract. Director and the chairman of the audit committee have decided that fraud has occurred
because of CA employee had backdated some contract.
Kumar (CA President), Richards and other executive denied any involvement in the
backdating, but federal prosecutors believe that other senior officers were also culpable. The
attorneys increase their effort that focus on Kumar and other senior management. Then they
discover that a number of e-mail exchange that related to Kumar and then Richards. Richards
resign from CA in 26 April 2004. SEC filed a formal complaint against Richards in the
September. The complaint is about head of sale at CA have facilitate the extension of the fiscal
quarter, allow subordinate to obtain contracts after the quarter end, and failed to alert the finance
and accounting department about contracts that may have been backdated. It also explain that
how the misreporting affected revenue and earnings during the year 2000 and 2001 fiscal year.
2.2 Cause of problems
In the case there are issues that contribute to the problems occurred in CA. the first issue
is accounting issue which is GAAP standards that allow software firm to recognize the entire
3
value of licensing contract as revenue in the quarter that the contract was affirmed. It also
contributes to the culture of CA to manipulate the revenue. The changes in revenue give an
impact to earning. All the creative accounting that use by CA also give impact to asset and
liabilities. When they record low revenue its means it will undervalued asset and overvalued
liabilities.
The second issue is about ethics, it is because Richards, Ira Zara nd other 6 executive
doing unethical work that give impact to CA. The creative accounting or gray area accounting is
legal but unethical because they try to show a good financial statement (dressing window) to
external party. This unethical behavior is cause by the incentive which is commission that was
base on sale. They try to show high sale to get high commission. Commission given is to
motivate the employees to increase sale for company but has been abuse bay some parties.
applied to the sales-driven culture in CA. he paid more attention to the sales and the revenues in
the company. Therefore, with the support of the management included Richards, the improper
revenue recognition method was implemented in the company.
There are several recommendations that CA can be implement to avoid these fraud in their
company. First, CA can change the accounting policies. They can use the legal way to
manipulate the revenues such as CA can change the calculation and change the allocation of the
research and development expenses within the Generally Accepted Accounting Principles to
reduce the expenses so that the profits can be higher.
Next, to overcome the fraud that happen in the company, CA can change the closing date
policy of the sales target. As it is mention in the case, the customers use delaying tactics to
negotiate with CA to get the better deal. Large proportions of the contract are booked in the final
week of the quarter that makes CA hard to recognize these contract in the current period and it
makes CA to backdate the contracts. CA can shorten the period for the sales target, for example,
it can be closed monthly so that the contracts can be recognized in time.
Adopting earning management strategies in order to manipulate the financial position of a
company is a widespread practice, when used appropriately. Negligence to use corporate
governance structures to avoid situations, such as the allegations against CA, has thus placed the
company in a legally vulnerable position.
companies are directed and controlled. It is the responsibility of the board members to create this
monitoring system, which overviews decision-making and control the activities of the company.
Without these procedures in place to govern the behaviors of the company. The role of corporate
governance mechanisms may have alleviated earnings management at CA.
Besides that, Richard mentions in the letter he wrote that we have created a performance
driven culture without the enough control framework for people to operate within this shows
that there was no real structure and proper internal accounting control as far as an indicator for
the growth. That is way CA pushed too much to reach the goal of estimated earnings regardless
of considering any rule or regulation, which cause CA to tragic results relating from poor
decision making and lack of organizational structure and control.
The CA should emphasize internal control on their management and financial report at
each quarter of the revenue and earnings it expected to earn during that quarter. One of the
internal accounting control that can be used by CA is control activities. Control activities are the
policies and procedures that assist in ensuring that management directive are successfully
implemented. They provide the means to address the various risks that may hinder the
achievement of the organizations objective. In essence, control activities are established in
response to perceived risks. Richard should provide each quarter of the revenue report to be
review by Board of CA and also include monthly review of financial statements by the treasurer
and Board of Directors and community manager.
values pricing and others whereby the Richard able to determine how much of revenue and
expense to classify on a current income statement.
financial statement. With regard to the organizations controls as a whole, the control framework
should be designed and implemented acrossComputer Associates (CA).
The conclusions is there are many ways to overcome the fraud in the Computer
Associates (CA). As stated above the best way to cope the financial fraud in the company by
having the strong internal control, establish the corporate governance among the management
and using the suitable accounting policies as it is the legal way to use for better performance of
the Computer Associates (CA)
10