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CA stock plunges on report of accounting probe

Shares in Computer Associates (CA) ended trading on the New York Stock Exchange yesterday (20 February) down more than 17% after the newspaper Newsday reported that federal authorities have begun an investigation into CA's accounting practices.

Newsday's article, based on information from "sources familiar with the investigation," said the US Federal Bureau of Investigation and the US attorney for the Eastern District of New York are exploring the possibility that CA violated federal criminal law by improperly distinguishing between revenue from software sales and revenue from maintenance and upgrade fees.

The New York Times also produced a report, citing sources close to the investigation. The Times report, which contained many of the same details as Newsday's account, was written by the reporter who ignited CA's last accounting flap. A Times article that ran last April quoted allegations by analysts and former employees that CA has used a variety of accounting tricks to disguise slumping sales. The charges outlined in that article were frequently cited by CA shareholder Sam Wyly during his unsuccessful proxy fight to replace several CA board members, including the company's co-founder.

CA said early Wednesday that it had not been contacted by authorities about an investigation and said its reporting of its financial results has always conformed to accounting principles. Representatives from the FBI and the US attorney's office declined to comment for Newsday's story.

CA's shares ended trading Wednesday at $20.91, CA's lowest figure in more than a year. During the day the stock hit a new 52-week low of $19.47. The plunge comes less than four weeks after CA reached a 52-week high of $38.74, buoyed by quarterly results that topped analysts' estimates.

CA has long been dogged by allegations about its accounting practices, which rely on pro forma results and rateable revenue recognition. In late 2000, it revamped its business model, moving to a subscription model for software sales and recognising revenue incrementally over the life of its contracts. CA maintains that the new model more accurately reflects its revenue and operations.

While several financial analysts have backed the new model, CA's overall ratings from analysts are unusually tepid. At least half a dozen financial analysis firms have neutral ratings on the stock, including Morgan Stanley Dean Witter, which has upgraded and then downgraded CA twice in the past 13 months.

CA's financial reports often show a wide gap between pro forma results and those calculated in accordance with standard accounting principles. In its most recent report, issued last month for CA's third fiscal quarter of 2002, CA posted pro forma revenue of $1.45 billion for the quarter and $417 million in net operating income. Under standard accounting principles, CA had quarterly revenue of $749 million and a $231 million net loss.

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