A Letter from Prison – Case Analysis

1. How serious was Stephen Richard’s actions? Why?

Stephen Richard's actions are considered serious because he used his power and position to please
the analyst community as the targets were set by outside parties (primarily the analyst community).
Although, Stephen’s in his letter genuinely believes that his actions were not as serious as Enron
or WorldCom, his actions were indeed serious.
Stephen’s focus was almost solely driven by the execution efforts within the business with strong
emphasis on tactical execution and promoted an unethical overly aggressive accounting practice
in the organization to meet the organization goals/targets.
As the head of global sales at Computer Associates, the role of Stephen was majorly responsible
for the fraud incident. He facilitated the fraud by first manipulating Computer Associate's quarterly
report by extending the fiscal quarter of the Company. This allowed the sales force to obtain the
contracts even after the quarter end and boost the reported quarterly earnings
He failed to alert the finance and accounting departments about contracts that may have been
backdated. All these practices were against the GAAP principles.
Stephen Richards, being the head of global sales did nothing to improve the internal control process
of the company and managerial use of discretion to influence reported earnings became a common
practice all over the company.
As a sales head of the division, Richard did not take his responsibilities to correct the manipulation
of the revenues in the financial statements but rather created a performance driven culture where
sales became number one priority.
He had prior knowledge of all the wrongdoings and was in a position to report it, but he chose not
to do so.
This brought the attention of the DOJ and SEC towards CA and they investigated the potential
wrongdoings as they found enough evidence to prove that the Stephens illegally facilitated the
backdating of many contracts.
 2. If Computer Associates achieved the same financial results using GAAP flexibility, does
your answer to question 1 change?

No, my answer would not change even the same financial results are achieved under GAAP
flexibility because CA under its management promoted a targets/execution driven culture in a way
that it violated many other rules of accounting and reporting that would create ultimate losses to
shareholders.
Delay of software release or product, defers the recognition of any revenue received for that
product and CA promoted that culture as these practices arise from flexibility in accounting
choices and management’s ability to determine and change real business decisions as per their
discretion which was misused here.
Although GAAP allows for discretion of managers in some financial reporting like provisions for
bad debt, size of an allowance for non-collectible accounts, inventory write-downs, valuation of
depreciation etc, but in any case they require accurate financial disclosure which CA failed to do.
The practice of aggressive accounting and manipulation in the earnings started in 1998 and
continued through 3rd quarter of 2000.
During the year 2000, the Company improperly inflated revenues by 25%, 53%, 46% and 22%
each quarter
The company in the second quarter of 2000 showed revenue of $557 million which was beyond
the $1.047 billion it could accurately claim because of these misleading of numbers, the company
reported 60 cents in earnings per share, beating the consensus Wall Street forecast of 59.
The company encouraged a execution driven attitude and kept on doing false reporting throughout.
Whether revenue being recognized two or three days early or late using GAAP flexibility, the
actions will be still considered illegal and misleading to shareholders which was the case here.
 3. Suppose you were placed in Stephen Richard’s position at Computer Associates and were
under pressure to extend the fiscal quarter. How would you handle the situation differently?
What would be the expected consequences?
If I were placed in Stephen Richard's position at Computer Associates(CA) and the pressures
associated with his high-level and stressful position, I would not have extended the fiscal quarters
or knowingly overlooked or encouraged the backdating of any contracts, regardless of the undue
pressures by the analyst community.
The senior management of CA including Stephens gave significant pressures to the team to reach
the goal of estimated earnings and as a result became a companywide practice regardless of any
rules or regulations.

I think too much emphasis was placed on Stephens and others in management on achieving
financial gains too quickly, without implementing proper strategies necessary to achieve the goals.
I would create a powerful corporate governance structure at the Top level. As Stephen Richard
noted in his letter the company’s board was too far removed to know the day-to-day operations of
the business. This would be another real factor to me that needs to change to realign the
organization so that all stakeholders are engaged in decision making act for its daily operations.
The company was growing rapidly with no emphasis on ethical responsibilities. So, I would have
rather emphasized on creating effective internal control system in the organization which would
promote good corporate governance culture within the organization.
I would also segregate accounting functions to different persons in a such manner that there is a
check for any of the material misstatements/improprieties by the management. An effective
internal control processes will definitely help prevent fraud in the organization.
As per report of investigators from a Sullivan and Cromwell(prestigious law firm), CA’s CFO Ira
Zar was involved in facilitating backdating of some contracts.
So, I would also recommend to hire independent auditors who will be involved reviewing and
auditing the financial statements and expressing an independent/unbiased opinion before it is being
issued to public.
Most importantly, I would end the aggressive sales goals and any aggressive compensation policy
that promotes an unethical behavior among the employees. The expected consequences could be
that it may take longer to reach their financial targets through slow and steady growth, but top
management and employees would be working towards attaining common goals that do not violate
rules and regulations. Performance measurement criteria and parameters also needs necessary
changes in this aspect.
I would use GAAP flexibility to promote a ethical & fair disclosures, recognizing revenue and
making an arrangement of signing contracts with clients in same quarter, rather than recognizing
revenue in earlier quarter and deferring contracts signing & then backdating the contracts date,
which falls under invalid business practices.