CA – When will it End?
The recent “special litigation committee” report released by CA’s board late last week, among many other things, states that founder Charles Wang was the mastermind behind the accounting fraud at the company. Mr. Wang, according to various newspaper reports, not surprisingly places the entire responsibility on his one-time protégé and former CA CEO Sanjay Kumar. Mr. Kumar pleaded guilty last fall and has been sentenced to a twelve year prison term. In addition, Mr. Kumar has agreed to make restitution to the tune of $800 million to shareholders hurt by the fraud.
The committee was formed in February 2005 to address ongoing consolidated litigation issues against the company. The 390 page report evaluates CA’s stand on various litigation involving former officers, employees and directors. More specifically these people are divided into the following groups: criminal defendants, former officer defendants, KESOP (Key Employee Stock Ownership Plan) defendants, oversight directors, settlement directors and auditor defendants. The simplest boiling down of the report and how it affects these different groups is as follows. CA should pursue claims against the criminal defendants, former officer defendants and KESOP defendants, and that CA should not pursue claims against the other groups.
There is little doubt that Mr. Wang is at the very least a fortunate man since the opening of the criminal prosecution effort for this accounting fraud began after the statute of limitations had expired, sparing him the fate of his one-time friend and protege. It is also evident that Mr. Wang whether motivated by the desire to minimize bureaucracy or sensitive to the risks of an electronic or paper trail was a very, careful man as is noted by his aversion to email or voicemail. In any event, apart from a desire to realize a fair and just outcome following an extremely difficult and prolonged period, why after so many years is Mr. Wang finally being pursued? What took so long?
As a former Wall Street sell-side analyst who began coverage of CA shortly after the company came public in 1981 up until my retirement from the street in 2005, I find the continuing saga of CA absolutely remarkable on many, many fronts.
Rumors about financial impropriety at CA swirled for many years before the New York Times article appeared in 2001 which is widely seen as a pivotal turning point with respect to the company’s financial operations. The catalyst for the article had been management’s decision driven by former CEO Sanjay Kumar to transition the company away from recognizing license revenues upfront to a new subscription model which would spread license and maintenance revenues evenly over the term of the agreement.
It is still amazing to us given the highly acquisitive nature of CA back in the 80s and 90s, the $1 billion incentive stock award for key employees, the ever present undercurrent of financial improprietary, that the fraud persisted for so long.
The irony of the past six or more years to long time observers of the company has been that regardless of Mr. Kumar’s guilt in the backdating of contracts, it was Mr. Kumar himself who was attempting to radically reform the company’s accounting in a bid for greater structure, conservatism and yes, ultimately, integrity.
Another irony is that for long time observers of CA it is inconceivable that a company so dominated by its founder, with such a reportedly close relationship with his protégé, that Mr. Wang could have been either unaware or innocent of the accounting fraud taking place at the company.
Finally, perhaps the biggest is that CA was by no means the only company engaging in questionable or inappropriate revenue accounting. In fact it is probably not unfair to suggest that virtually all software companies bent the rules to varying degrees in the bid to manage their revenues and meet Wall Street expectations.
While we by no means want to be seen as apologists for these companies that took liberties in how strictly they applied revenue recognition practices of the time, we do think it is important to point out that unlike many of the companies that engaged in sham accounting during the past decade suggest as Worldcom and Enron, the scale of the fraud is not comparable.
Furthermore we make these points not in the effort to defend either Mr. Kumar or Mr. Wang or for that matter any of the participants in the fraud, but in the case of CA and its shareholders’ to ask a number of questions.
At what point does the continued pursuit wrong doers, cost more than the benefit to shareholders?
To what extent do these continued efforts to resolve these problems represent a distraction to CA’s efforts to regain momentum with its customers?
Last, but not least when does CA believe that this long dark period in its history will finally be history?
The committee was formed in February 2005 to address ongoing consolidated litigation issues against the company. The 390 page report evaluates CA’s stand on various litigation involving former officers, employees and directors. More specifically these people are divided into the following groups: criminal defendants, former officer defendants, KESOP (Key Employee Stock Ownership Plan) defendants, oversight directors, settlement directors and auditor defendants. The simplest boiling down of the report and how it affects these different groups is as follows. CA should pursue claims against the criminal defendants, former officer defendants and KESOP defendants, and that CA should not pursue claims against the other groups.
There is little doubt that Mr. Wang is at the very least a fortunate man since the opening of the criminal prosecution effort for this accounting fraud began after the statute of limitations had expired, sparing him the fate of his one-time friend and protege. It is also evident that Mr. Wang whether motivated by the desire to minimize bureaucracy or sensitive to the risks of an electronic or paper trail was a very, careful man as is noted by his aversion to email or voicemail. In any event, apart from a desire to realize a fair and just outcome following an extremely difficult and prolonged period, why after so many years is Mr. Wang finally being pursued? What took so long?
As a former Wall Street sell-side analyst who began coverage of CA shortly after the company came public in 1981 up until my retirement from the street in 2005, I find the continuing saga of CA absolutely remarkable on many, many fronts.
Rumors about financial impropriety at CA swirled for many years before the New York Times article appeared in 2001 which is widely seen as a pivotal turning point with respect to the company’s financial operations. The catalyst for the article had been management’s decision driven by former CEO Sanjay Kumar to transition the company away from recognizing license revenues upfront to a new subscription model which would spread license and maintenance revenues evenly over the term of the agreement.
It is still amazing to us given the highly acquisitive nature of CA back in the 80s and 90s, the $1 billion incentive stock award for key employees, the ever present undercurrent of financial improprietary, that the fraud persisted for so long.
The irony of the past six or more years to long time observers of the company has been that regardless of Mr. Kumar’s guilt in the backdating of contracts, it was Mr. Kumar himself who was attempting to radically reform the company’s accounting in a bid for greater structure, conservatism and yes, ultimately, integrity.
Another irony is that for long time observers of CA it is inconceivable that a company so dominated by its founder, with such a reportedly close relationship with his protégé, that Mr. Wang could have been either unaware or innocent of the accounting fraud taking place at the company.
Finally, perhaps the biggest is that CA was by no means the only company engaging in questionable or inappropriate revenue accounting. In fact it is probably not unfair to suggest that virtually all software companies bent the rules to varying degrees in the bid to manage their revenues and meet Wall Street expectations.
While we by no means want to be seen as apologists for these companies that took liberties in how strictly they applied revenue recognition practices of the time, we do think it is important to point out that unlike many of the companies that engaged in sham accounting during the past decade suggest as Worldcom and Enron, the scale of the fraud is not comparable.
Furthermore we make these points not in the effort to defend either Mr. Kumar or Mr. Wang or for that matter any of the participants in the fraud, but in the case of CA and its shareholders’ to ask a number of questions.
At what point does the continued pursuit wrong doers, cost more than the benefit to shareholders?
To what extent do these continued efforts to resolve these problems represent a distraction to CA’s efforts to regain momentum with its customers?
Last, but not least when does CA believe that this long dark period in its history will finally be history?
posted by jcm at 9:38 AM
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