A federal probe of Computer Associates International's accounting
practices is focusing on whether the company wrongly booked more
than $500m (£343.1m) in revenue in 1998 and 1999 to inflate its
stock price and benefit top executives, according to a report in
The Wall Street Journal.
In a regulatory filing last week, CA said that the investigation,
being conducted jointly by the US Department of Justice (DOJ) and
the US Securities and Exchange Commission (SEC), "appears to be
focusing on issues relating to the company's historical revenue
recognition policies and practices."
Parties outside CA have received subpoenas from the SEC in
conjunction with the investigation, with which CA continues to
co-operate voluntarily, the company said in its filing.
The federal inquiry concerns CA's restatement of earlier revenue as
it relates to an infamous stock option award made in 1995,
according to
The Wall Street Journal.
That year, CA awarded a large stock incentive package to three top
company officers, co-founders Charles Wang and Russell Artzt and
then-president Sanjay Kumar, now also CA's chief executive officer.
The terms of the grant specified that the shares would vest when
CA's shares hit and sustained a target price. The benchmark was met
in 1998 and the three executives combined received nearly $1bn in
CA stock.
But news of slowing sales soon dragged down CA's share price, and
furious investors accused CA of manipulating its accounting to push
the share price up to the grant's vesting price.
The executives later returned a portion of the shares from the
grant to settle a shareholder lawsuit.
Investigators are examining why CA overstated revenue for a period
surrounding the 1998 stock grant.
In May 2000, CA retroactively reclassified previous revenue and
expenses for that period, a revision that investigators are
probing, the newspaper said.
The 2000 change in expense and revenue classification came at the
advice of its auditor, and had no material affect on CA's
historical revenue growth patterns for the five-year period from
1996 to 2000, CA said in a statement.
CA's 1998 statements and financial projections remain the subject
of a class-action lawsuit being pursued in a US District Court.
The case, a consolidation of several shareholder complaints filed
in 1998, is now in the discovery phase following the court's
rejection of CA's motion to dismiss.
In late 2000, CA again adjusted its accounting, radically changing
the way it records sales revenue as part of a shift towards selling
software through subscription licenses.
That change sparked another round of shareholder lawsuits in
February and March of this year, after news broke of the SEC and
DOJ inquiries.
Shares of CA were down 2.8%, at $17.07, in afternoon trading
yesterday on the New York Stock Exchange.