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This case is about Accounting Fraud. Richard, the executive of the Computer Associates Company, had a responsibility to keep watch of all contracts signed when the payments are guaranteed. It has been found that his reluctant to do his job caused sales drive-culture to fade away. This was also necessitated by the company failure of following the GAAP (generally accepted accounting principles) in between 1998 and 2001 (Soltes 7-9). However, Mr Richard says that this mode of accounting could not cause the Computer Associates Company to be declared bankrupt and by the end of 2001 the company had sold the current accounting actions alongside the recorded sales. Moreover, the sales accounting department had denied of being informed about the improper goals of obtaining contracts from that the company had closed.
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Q1 How serious were Stephen Richards actions? Why?
Richards decided to avoid the Generally Accepted Accounting Principles (GAAP) and allow subordinates the ability to obtain contracts individually and negotiate deals on behalf of Computer Associates he caused serious problem to the company considering that those contracts would have to be recognized by the firm although they had been stamped older signatures. Richards’s actions made him more aggressive in accounting because he wanted to implement the culture of the company that followed the “sales –driven-model.”
As a result of Richards actions, the CA investigations reported changing the routine to what was called the “35-day month” (Soltes 8-10). This idea becomes part of the normal practice in all the sectors of the company. Every accounting officer was to adopt a method of filing force revenue statements. According to the filled returns report of a specific period, the company could show it had attained its target, whereas they had really not achieved such sums. When Richard found out about the scheme to defraud the company, he introduced sales managers and other subordinates to new terms and extensions of their contracts. This was later backdated to cover up evidence and to condemn the actions of Richard which exceedingly caused the earning of CA to rapidly grow and popularize the use of the discretion in increasing the sales level. Such actions were considered crimes by the moment he started to cut off spending’s of the company in order to meet the market expectations without bleaching the (GAAP) principle. Based on the revenue statements that was garnered from the securities markets and the exchange commissions, CAs workers and subordinates did not pay attention to their financial responsibilities. This promoted prolonged physical quarter which allowed the employers of CA to obtain and negotiate backdated contracts and deals. Some observers say that the CA earning was openly discussed in the company and Richard was prosecuted only for not reporting whereas in reality before the situation was discovered everybody had taken part in the game and each had a unique role as a player. During his tenure as the executive manager, Mr Richard reports that he had to implement some tough decisions in order to make the morale of the workers better for achieving target goals.
When the case finally was concluded Richard was found guilty, for his inability to report the actions that caused huge losses once the actions were revealed.
Q2 If computer associates achieved the same financial results through GAAP flexibility, does your answer to Q1 change?
Most likely not. Consideration the GAAP measures, there exist risks of manupulating accouting figures and this possesses a big probability that the reports made by the company would have errors, and consequently huge loses and legal implications for the company. As the CEO, Richard gave extensive authority to lower executive’s bodies and gave the sales team mandate to carry out activities that were termed by the fraud investigators as illegal. The company then feared that they would suffer consequential fall in the stock markets, causing it and shareholders to lose huge sums of capital.
Fraud and manipulation had implications of the company paying back for the CEO’s actions. Compensation of millions of losses was paid to shareholders as a result of the criminal conduct of the company. Evidence from the investigation clearly stated that all transactions made were genuine and there was no evidence that CA concentrated on the prosecution of the executive officers for no reason.
Q3 Suppose you were placed in Stephen Richards 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?
I would restructure a new policy that would serve to protect the shareholders and the company from having to break away from the GAAD codes of conducts. The main reason that Computer Associates decided to prosecute Mr Richard was for the reason that the shareholders would accuse the company of withholding one section of the company income included in the revenue recognition of their dividends. Thus, if a better infrastructure was introduced to include the revenues the resulting cases could not be envisaged. Further, introducing such a policy would cause the company to benefit more as GAAP principles would have been customized specifically for the customers and the staff to attain maximum profit. In addition, extending the fiscal quarter could help the net profits of shareholders to grow periodically hence attracting a bigger number of investors. The demand for the company in the stock markets would grow, and this would cause a rise of the company’s value just for the reason of the consistent rate by which the companies share the profits gained quarterly.
- Soltes, Eugene. A Letter from Prison. Harvard Business School. 31 March, 2011.