A Letter from Prison Case Analysis
Essay by shafiqauaf • December 23, 2012 • Case Study • 1,678 Words (7 Pages) • 12,602 Views
A Letter from Prison Case Analysis
This case is mostly about the Accounting Fraud, here it has pointed to the Richard who was the executive of a company named Computer Associates. The company sells software products which usually have license last for a period of time. The company has a "sales-driven-culture" which is "the more you sell, the more commissions you will get". Richard was the head of Sale Department; his responsible was to keep an eye on things like when the contracts are signed and when those payments are assured. It seems that he faced some problem on his job because he was put in jail. The accountant department had recorded the sales in the current quarter while these sales should be recorded in the next quarter that took place at the fourth quarter of 1998 and the second quarter of 2001. According the evidence and the investigation of prosecutors, the action account department has taken was not following the GAAP. However, to the word of Richard himself, this way of accounting was not a really big deal like the WorldCom bankrupt or Enron bankrupt. And he is also very confident to continue developing his career in the future after he got out of jail.
1. How serious were Stephen Richards' actions? Why?
The Action of Stephen Richards's was really serious; he manipulate Computer Associate's quarter end cutoff to align CA's financial reported results with the market expectations without considering the Generally Accepted Accounting Principles (GAAP) and he didn't pay attention to their financial reporting responsibilities. Based on the U.S. Securities and Exchange Commissions, CA's executives including Richards prolonged the fiscal quarter; worked with and allowed subordinates to negotiate and obtain contracts after the quarter ended, thoughtlessly disregarding the fact that, CA would improperly recognize the revenue from those contracts, and failed to alert CA's Finance or Sales Accounting Department that CA salespersons that reported to Richards were obtaining contracts with backdated signatures dates after quarter end."
Richard's actions led to "exceedingly aggressive accounting practices" it boosted CA's reported earnings and the managerial use of discretion to greatly influence reported earnings was not only used by Richards', but it become as a normal practice in all over the company. Some manager said about CA's fraud "Like a team that plays on after the final whistle has blown, Computer Associates straggle was continued until achieving the targeted goal and determined sale level.
Richard on his letter mentioned that, he himself and the CEO applied significant pressures on their team to meet the goals which were set for them, also Richard wrote that, performance was measured by internal goals based on the expectation set by outside parties, analyst community, specifically to meet Wall Street quarterly per-share earnings estimates, "and this was thought as a key to keeping a company's stock price rising." Richards with the CEO allegedly had discusion routinely and conferred with each other and with Zar (CFO) during the week following the end of fiscal periods, and also during the "flash period", the three business days after the end of fiscal quarter, to know whether CA had earned sufficient revenue to meet the projections, then the decision to closed CA's books only after assured that CA had generated enough revenue to meet the quarterly projections, this method, that was sometimes known as the "35-day month" or the "three-day window", was not in accordance to the GAAP and caused in the filing of materially false financial statements. The goal of the 35-day month was to have the give the chance CA to report that it met or exceed its projected quarterly revenue and earnings when, in truth, it had not. Referring to the Scheme to Defraud, Richard guided the CA sales managers and other subordinate to negotiate and finalize additional contract/agreements, which were backdated to cover the fact that the agreements had been finalized after that quarter.
As result, CA by purpose recorded and reported in the earlier quarter revenue associated with the backdated agreements. Stephen Richard actions are highly serious because he had knowledge of the wrongdoings and he was in the position to report it, but he didn't report. Richards' and other CA's executives action seriously victimized the shareholders as they suffered enormous losses once the practices were revealed. Therefore, "Richard was known to be guilty."
2. If Computer Associates achieved the same financial results through GAAP flexibility, does your answer to question 1 change?
Probably not, with the consideration of GAAP the risk of manipulation was that CA may had more likely made reporting mistake, whic would lead to legal problems and huge losses. As long as the CA's executives including Richards had the purpose of wrongdoing actions they would cause massive losses to the shareholders of the company and to the SEC. Although such manipulations and fraud resulted CA to payback " Millions of Dolor for the purposes of compensating shareholders for losses caused out of the company's criminal conduct." monitoring that, the investigation and evidence on Computer Associates shows that the CA didn't make false transaction, all actual transaction and business
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