案例分析assignment 代写 Computer Associates

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  • 案例分析assignment 代写 Computer Associates
    ________________________________________________________________________________________________________________
    Professor Eugene Soltes prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as
    endorsements, sources of primary data, or illustrations of effective or ineffective management.
    Copyright © 2009, 2010, 2011 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-
    800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may
    not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
    EUGENE SOLTES
    A Letter from Prison
    On February 14, 2008, Stephen Richards, inmate #71320-053 at Taft Federal Correctional Institution,
    completed a letter to Eugene Soltes, a student at the University of Chicago Booth School of Business.
    Richards was the former global head of sales at Computer Associates. Exhibit 1 provides the list of
    questions Soltes asked Richards. Exhibit 2 is a copy of the letter Soltes received in return.
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    110-045  A Letter from Prison
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    Computer Associates and Stephen Richards
    Computer Associates International, Inc. (CA) began as a four-person start-up in 1976. Its founder,
    Charles Wang, sought to fill a growing need for mainframe computing software for IBM computers.
    Computer Associates offered a range of products, including database, application, and financial
    management software, to fulfill the computing needs of businesses. 1
    In 1988, soon after graduating from Avondale College in Australia, Stephen Richards joined CA's
    Sydney office. Within two years, Richards became manager of the Brisbane sales office. Richards
    impressed management, soon receiving a promotion to run the New Zealand office and then, two
    years later, the Australia office. By 1995, Richards was a leading regional figure for CA as the senior
    vice president of the Pacific region. 2
    Richards’ rise at CA paralleled the rapid growth of CA as a firm. During the 1980s and 1990s, CA
    acquired numerous competitors and firms producing complementary software products. By the late
    1990s, CA had almost 18,000 employees and subsidiaries in nearly 100 countries.
    In April 1999, Richards caught the eye of CA President Sanjay Kumar and was promoted to lead
    one of Computer Associates’ North American regional offices with over 3,500 employees. Soon after,
    in April 2000, Richards was promoted to global head of sales. 3 Richards’ growing responsibility and
    success was rewarded accordingly with a half-million dollar base salary and generous option
    compensation.
    For most software products that the CA sales team sold, clients purchased a license to use the
    product for a period of three to ten years. During the licensing period, CA provided software updates
    and technical support. Fees increased with the length of the contract, although each additional year of
    licensing was priced lower than the previous year to reflect software obsolescence. With even a small
    contract, the fees could amount to hundreds of thousands of dollars.
    When a license contract was finalized, CA allocated revenues to licensing fees and to usage and
    maintenance fees. Normally, at least 80% was allocated to the licensing fee. Under Generally
    Accepted Accounting Principles (GAAP), revenues from software licensing were recognized once a
    contract was signed, the software was delivered, and payment was reasonably assured. Once these
    three conditions were met, a software firm could recognize the entire value of the licensing fee as
    revenue. In accordance with GAAP, CA recorded the entire present value of the licensing contract in
    the quarter when the revenue recognition criteria were met.
    The immediate recognition of the entire value of multi-year software licenses in the quarter the
    contracts were finalized created numerous challenges for CA management. One analyst noted that
    “customers learned, or were advised by consultants, that the later into a quarter they waited to sign a
    contract, the more likely they were to get a better deal (bigger discounts, extended payment terms,
    free services, etc.). . . . Moreover, the bigger the deal, the more likely that the prospect would use such
    1 For more information on Computer Associates, see Amy Hutton, “Computer Associates International,” HBS No. 102-061
    (Boston: Harvard Business School Publishing, 2002) and Paul M. Healy and Krishna Palepu, “Computer Associates
    International, Inc.: Governance and Investor Communication Challenge,” HBS No. 103-107 (Boston: Harvard Business School
    Publishing, 2003).
    2 Amanda Wells, “Rising Through the Ranks,” InfoTech Weekly, March 5, 2001.
    3  Peter Griffin, “After Long Months, It’s Long Years,” New Zealand Herald, January 6, 2007.
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    A Letter from Prison  110-045
    3
    delaying tactics.” 4 Consequently, a significant portion of CA revenue was commonly booked during
    the final week of the quarter.
    Each quarter, management set internal sales targets. With a “sales-driven culture,” sales associates
    were under immense pressure to hit these sales targets. The sales associates were also incentivized by
    commissions that were tied to these targets. Those sales associates who met or exceeded their sales
    targets were richly rewarded. It was not uncommon for a successful sales associate to receive over a
    million dollars in compensation. 5
    Despite the challenges and pressures, CA prospered during the 1990s. Computer Associates
    reported that 95% of Fortune 500 companies used CA software and that CA trailed only Microsoft
    and Oracle in total sales in the software industry. In addition, Fortune magazine named Computer
    Associates one of America’s “most admired” companies. When asked about his job by a reporter,
    Richards said, “I love my job. It’s fantastic.” 6
    Allegations against Computer Associates
    Over time, management found it increasingly difficult to accurately forecast revenues and
    earnings each quarter. In some cases, management found itself unable to warn analysts about
    unexpected shortfalls in revenue until the quarter was over. In July 2000, CA announced that its
    financial results for the first quarter of 2001 would “be less than current Wall Street estimates.” 7
    Computer Associates management noted that “several large contracts, previously expected to close in
    the final day of the quarter,” contributed to this shortfall. 8 In response, CA’s stock fell by 42%.
    On April 29, 2001, the New York Times published an article that suggested CA management had
    employed overly aggressive accounting practices to boost earnings. The article said “the practices
    were so widespread that employees joked that C.A. stood for ‘Creative Accounting.’” 9
    However, aggressive financial reporting was not an uncommon charge for a rapidly growing and
    successful firm like CA. Numerous pieces of evidence suggested that earnings management—the
    managerial use of discretion to influence reported earnings—was a widespread corporate practice
    (Exhibit 3).
    In response to the New York Times article, CA issued an eight-page response which, among other
    things, defended its accounting practices. In this April 30, 2001, response, CA wrote that its auditor,
    KPMG LLP, reasserted “that the financial statements were presented, in all material respects, in
    accordance with generally accepted accounting principles.” 10
    4 Deutsche Bank Equity Research, “Computer Associates,” November 9, 2000.
    5 Griffin, “After Long Months.”
    6 Wells, “Rising Through the Ranks.”
    7 Computer Associates press release, July 3, 2000.
    8  Laura Johannes, “Computer Associates Says Latest Results Will Be Hurt by Delays in Big Contracts,” Wall Street Journal, July
    5, 2000.
    9 Alex Berenson, “The Past May Haunt Computer Associates,” New York Times, April 21, 2001.
    10 Computer Associates, Form 8-K, April 20, 2001.
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    DOJ and SEC Investigation
    Despite public reassurances from CA that their accounting procedures followed GAAP, the
    allegations drew the attention of federal investigators at the Department of Justice (DOJ) and the
    Securities and Exchange Commission (SEC). Kumar reassured concerned board members that the
    claims against the firm were unfounded. Nevertheless, CA’s board enlisted the firm’s general
    counsel, Steven Woghin, to examine the allegations. Preliminary discussions with individual
    managers and the available documentation did not seem to support claims against the firm.
    However, in July 2003, federal investigators expressed dissatisfaction with CA’s internal
    investigation of the allegations. Faced with this criticism, CA’s board hired the prestigious law firm
    Sullivan & Cromwell to investigate more aggressively. Attorneys and forensic accountants carefully
    combed through employee computers and Woghin provided attorneys with twenty-three boxes of
    documents that were originally missing. Within three months, the team of investigators found
    sufficient evidence to implicate the firm’s CFO, Ira Zar, of facilitating the backdating of some contracts.
    On October 7, 2003, Walter P. Schuetze, director and chairman of the audit committee, called the
    board together to announce that there was definitive evidence that CA employees had backdated some
    contracts. The following day, the firm issued a press release that stated CA “found that a number of
    software contracts . . . appear to have been signed after the end of the quarter in which revenues
    associated with such contracts had been recognized. Those revenues should have been recognized in
    the quarter in which the contract was signed . . . at the same time, the committee has found no
    evidence to suggest that the revenues and cash flows associated with these contracts were not genuine.
    The contracts were valid, products were delivered, and the cash was received.” 11 However, due to the
    improper recognition of revenues, three executives were forced to resign, including Zar and two of his
    subordinates.
    Although Kumar, Richards, and other executives denied any involvement in the backdating during
    meetings with attorneys from Sullivan & Cromwell, federal prosecutors strongly believed that other
    senior officers were also culpable. If prosecutors were correct and management was obstructing the
    investigation by misleading investigators, CA as a firm could be indicted for serious wrongdoing. 12
    The attorneys redoubled their efforts, with a focus on Kumar and other senior management.
    Eventually, in April 2004, the attorneys discovered a number of e-mail exchanges that implicated
    Kumar and later Richards. On April 26, 2004, Richards resigned from Computer Associates, and by
    September, the SEC filed a formal complaint against Richards.
    In the complaint, the prosecutors alleged that Richards, as global head of sales at Computer
    Associates, facilitated the extension of the fiscal quarter, allowed subordinates to obtain contracts
    after the quarter end, and failed to alert the finance and accounting departments about contracts that
    may have been backdated. The complaint also detailed how the misreporting affected revenues and
    earnings during the 2000 and 2001 fiscal years (Exhibit 4). The complaint alleged that this misconduct
    occurred between the fourth quarter of 1998 and the second quarter of 2001. Along with Richards, six
    other executives of Computer Associates were indicted on similar charges. This included CA’s
    general counsel, Woghin, who later admitted that he coached executives to mislead investigators.
    11 Computer Associates press release, October 8, 2003.
    12 Charles Forelle and Joann S.Lublin, “In CA Probe: Recovered E-mails, Surprise Cache of Documents,” Wall Street Journal,
    September 24, 2004.
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    A Letter from Prison  110-045
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    On April 24, 2006, Richards pleaded guilty and was sentenced to seven years in the Taft Federal
    Correctional Institution in California. Reflecting on the situation, Richards stated he felt that there
    was an important difference between Computer Associates and other well-publicized corporate
    scandals: “WorldCom bankrupt, Enron bankrupt, Adelphia bankrupt, it’s a radically different
    environment to those. There were no shell companies where liabilities were hidden or liabilities
    converted into assets or any of that kind of stuff. This was simply a timing issue of a deal coming in
    and being recognized two or three days earlier as opposed to two or three days later.” 13
    13 Stephen Richards, interview by Peter Griffin, “After Long Months, It’s Long Years,” New Zealand Herald, January 6, 2007.
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    110-045  A Letter from Prison
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    Exhibit 1 Questions for Stephen Richards
    1. Can you describe how your performance at Computer Associates was measured and the
    challenges you faced in trying to achieve your performance goals?
    2. How did these forces influence you, other managers, and your board’s decision making?
    3. What effect did these goals have on your success at the firm?
    4. Can you discuss the management of earnings and financial performance?
    5. Did you feel that this managerial flexibility led to more severe problems?
    6. What role did compensation play in your decision making?
    7. How do you think the growth in option compensation may have affected decision making?
    8. Are there any additional forces that shaped your decision making?
    9. Do you believe that you will be able to participate in business in the future?
    10. How have the events affected you socially?
    11. Do you have any additional thoughts that would be insightful to help understand the
    dilemmas and challenges faced by managers and by those who are not yet managers?
    Source:  Casewriter.
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    A Letter from Prison  110-045
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    Exhibit 2 Letter from Stephen Richards
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    Exhibit 2 (continued)
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    A Letter from Prison  110-045
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    Exhibit 2 (continued)
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    Exhibit 2 (continued)
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    Exhibit 2 (continued)
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    Exhibit 2 (continued)
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    A Letter from Prison  110-045
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    Exhibit 2 (continued)
    Source:  Letter from Stephen Richards to Eugene Soltes.
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    Exhibit 3 Earnings Management
    Description
    Earnings management is the managerial use of discretion to influence reported earnings.
    Numerous other phrases, including “aggressive accounting,” “financial statement management,” and
    “income smoothing,” are often used to describe earnings management. The practice arises from
    flexibility in accounting choices and management’s ability to time and change real business decisions.
    Within the accrual accounting system, managers have significant discretion with their firms’
    accounting choices. Management has the ability to make choices that can opportunistically lead to
    higher or lower reported earnings. Examples of accounting estimates that can be understated or
    overstated include:
    –  Provision for bad debt
    –  Size of an allowance for uncollectible accounts
    –  Need and size for inventory write-downs
    –  Useful life and salvage value for depreciation
    –  Rate of return expected on pension assets
    Management can also make real business decisions with the primary objective of manipulating
    reported earnings (i.e., “real earnings management”). Unlike actions taken within the accounting
    system, these choices affect both earnings and the underlying cash flows of the firm. Examples of real
    earnings management include:
    –  Decelerating research and development
    –  Postponing advertising expenditures
    –  Changing a product release date
    Frequency
    In a speech titled “The ‘Numbers Game,’” the former chairman of the SEC, Arthur Levitt,
    described the practice of earnings management as “widespread.” He noted that the practice “has
    swelled in a market that is unforgiving of companies that miss their estimates.” a
    Several pieces of academic evidence provide support that earnings management is pervasive
    among publicly traded firms.
    Survey evidence of accounting choice and real earnings management:  A survey of 312
    CFOs and financial executives found that 59% would forgo a project with a positive net present value
    (NPV) if undertaking the project would cause their firm to fall short of the analyst consensus forecast.
    Eighty percent of the executives would choose to decrease discretionary spending (e.g., R&D or
    advertising) to hit a desired target. In addition, nearly 25% agreed that their firm might draw down
    on reserves previously set aside, postpone taking an accounting charge, or repurchase common
    shares to achieve the desired earnings target. b
    Large sample evidence of the tendency for firms to marginally meet or exceed analyst
    benchmarks: Figure A shows a histogram of annual earnings surprises. The earnings surprise is
    the difference between a firm’s reported earnings-per-share (EPS) and the analyst’s forecasted EPS.
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    A Letter from Prison  110-045
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    The figure shows that the number of firms narrowly beating expectations (.01) significantly exceeds
    the number of firms narrowly missing expectations (-.01). This evidence suggests that managers may
    be managing earnings to marginally meet or exceed analyst expectations. c
    Figure A
    Large sample evidence of earnings smoothing: An unexpectedly large number of firms
    report consistent strings of earnings increases in spite of fluctuations in economic conditions and
    changes in the business cycle. One study examined data from the early 1960s to 2004 and found that
    746 firms reported increasing EPS for at least 20 consecutive quarters. In addition, when operating
    income was low, firms had a higher tendency to report more positive special items. d Similarly, when
    operating income was high, firms had a tendency to report more negative special items. e
    a Arthur Levitt, “The ‘Numbers Game,’” Speech given at the NYU Center for Law and Business, September 28, 1998.
    b John R. Graham, Campbell R. Harvey, and Shiva Rajgopal, “The Economic Implications of Corporate Financial Reporting,”
    Journal of Accounting and Economics, 40 (2005), 3-73.
    c Sanjeev Bhojraj, Paul Hribar, Marc Picconi, and John McInnis, “Making Sense of Cents: An Examination of Firms that
    Marginally Miss or Beat Analyst Forecasts,” Journal of Finance, 64 (2009), 2361-2388.
    d Special items are charges that are infrequent or unusual in nature. Accounting Principles Board Opinion No. 30 (Reporting
    the Results of Operations).
    e James N. Myers, Linda A. Myers, and Douglas J. Skinner, “Earnings Momentum and Earnings Management,” Journal of
    Accounting, Auditing and Finance, 22 (2007), 249-284.
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    110-045  A Letter from Prison
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    Exhibit 4 Effect of Earnings Management at Computer Associates
    Fiscal Quarter
    GAAP Value
    of Revenue
    Properly Recorded
    GAAP Value of
    Contracts that CA
    Signed After

    案例分析assignment 代写 Computer Associates
    Quarter End
    GAAP Value of
    Contracts that
    Clients Signed
    After Quarter End
    GAAP Value of
    Revenue
    Improperly
    Accelerated
    and Recorded
    Percentage that
    Properly Recorded
    Revenue Was
    Inflated by
    Improperly
    Accelerated Revenue
    Q1, FY2000  $977,165,281  $122,230,689  $122,604,030  $244,834,719  25%
    Q2, FY2000  $1,047,256,904  $90,099,723  $467,643,373  $557,743,096  53%
    Q3, FY2000  $1,239,902,741  $170,450,718  $401,646,541  $572,097,259  46%
    Q4, FY2000  $1,748,131,031  $179,493,620  $199,375,348  $378,868,969  22%
    Q1, FY2001  $1,135,600,000  $126,740,000  $15,660,000  $142,400,000  13%
    Q2, FY2001  $1,462,040,000  $214,720,000  $4,240,000  $218,960,000  15%
    Fiscal Quarter
    Total Revenue
    Properly Recorded
    Total Revenue
    Improperly
    Recorded
    Analyst EPS
    Estimate
    Announced
    EPS
    EPS without
    Improperly
    Recognized Revenue
    Q1, FY2000  $977,165,281  $244,834,719  $0.47  $0.49  $0.29
    Q2, FY2000  $1,047,256,904  $557,743,096  $0.59  $0.60  $0.05
    Q3, FY2000  $1,239,902,741  $572,097,259  $0.90  $0.91  $0.31
    Q4, FY2000  $1,748,131,031  $378,868,969  $1.13  $1.13  $0.82
    Source:  SEC v. Sanjay Kumar and Stephen Richards, 04 Civ. 4104 (E.D.N.Y.)(Glasser, I.L.), September 21, 2004.
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    案例分析assignment 代写 Computer Associates