Report: CA probe focuses on 1998, 1999 revenue

A federal probe of Computer Associates International Inc.'s accounting practices is focusing on whether the company wrongly booked more than $500 million in revenue in its 1998 and 1999 fiscal years in order to inflate its stock price and enrich top executives, according to a report today in The Wall Street Journal.

In a regulatory filing last week, Islandia, N.Y.-based CA said that the investigation, being conducted jointly by the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), "appears generally 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 as part of the investigation, with which CA continues to cooperate voluntarily, the company said in its filing (see story).

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 Journal.

That year, CA awarded a large stock incentive package to three top company officers: co-founders Charles Wang and Russell Artzt and President Sanjay Kumar, who is now also CA's CEO. 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 $1 billion 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, according to the Journal. In May 2000, CA retroactively reclassified previous revenue and expenses for that period, a revision that investigators are probing, the newspaper said.

"We continue to believe CA has acted appropriately," the company said today in a prepared statement.

The 2000 change in expense and revenue classification came at the advice of its auditor and had no material effect on CA's historical revenue growth patterns for the five-year period from 1996 to 2000, CA said.

CA's 1998 statements and financial projections remain the subject of a class-action lawsuit being pursued in U.S. District Court for the Eastern District of New York. 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 practices, radically revamping the way it records sales revenue as part of a shift toward 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 (see story).

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