CEO faces new indictment. Could
auditors have detected the fraud ?|
a revised indictment against former Computer Associates ("CA") CEO,
Sanjay Kumar, the government adds more details that it says prove Kumar and former
CA global head of sales, Stephen Richards, knowingly inflated CA's accounting
and took steps to cover up their actions. The original indictment accused Kumar
of inflating sales by $2.2 billion through the use of a "35-day month practice,"
which enabled CA to book licensing revenue it had not yet received. The revised
indictment, state Kumar and Richards knowingly distorted CA's accounting records
and took steps to hide their actions. The new charges allege Kumar paying a multi-million
dollar bribe to cover up a scheme to inflate sales.
in 2000, a former client based in Asia had signed a $27 million licensing agreement
with CA to coincide with CA's agreement to license the client's software for $27
million. Prosecutors charge that Kumar approved the "swap" even though
both firms never used or sold the licensed software from each other. The latest
charges claim Kumar allegedly paid a $3.7 million bribe to the businessman to
cover up his knowledge of falsifying business transactions in order to inflate
former CA executives, including Steven Woghin, the former general counsel have
already pleaded guilty to conspiracy to commit securities fraud and obstruction
of justice. Woghin is allegedly one of 2 executives who negotiated the payment
to the unnamed businessman at Kumar's direction.
2004, CA has agreed to pay $225 million to settle the original investigation by
the Department of Justice and the SEC.
is often difficult to prove when a conspiracy is involved, especially at the senior
management levels. However, based on my experience, one of the first things to
look for by the accounting department is to obtain a copy of the sales contract
and verify that terms of the agreement were actually met before before recording
The bogus transactions could have been analyzed from 2 different
perspectives, sales and expenses.
With something as nebulous as software
licensing, there are generally key components one should look for when analyzing
sales. The first is "delivery" of CA's software code to the licensee.
The second is verification from CA's technical support team to the licensee. Normally,
a sale in the magnitude of $27 million would include training and technical support
to the licensee. The third is for shipment of the product by the licensee if it
was intended for resale. In this instance, the licensee is often known as a value
added reseller ("VAR").
The fourth and obvious is did CA receive
a check for $27 million from the client?
If it were a bogus "swap"
transaction, couldn't one argue that a check didn't need to be cut since CA and
the other firm entered into a transaction of equal value ? No. As part of internal
accounting control procedures, the transactions are separate and distinct.
fifth and most revealing confirmation would be identifying who would have received
credit for the sale and was a commission paid out. If a legitimate sale were taking
place, you better believe someone was going to claim credit for the transaction
and the firm more than willing to pay out such commission. Generally, a sales
person receives a "commission" for the sale. Even where there is no
formula driven commission, a year end bonus is often dictated by how much revenue
a salesperson generates. Based on the information available, or in this case,
not available, the accounting department should have been suspicious.
analyzing expenses, the accounting department would also look for a copy of the
contract CA supposedly signed when entering the "consulting agreement".
The contract would have outlined the services to be rendered, specific departments
that would be involved with the consultants, and the expected payment schedules
for those services rendered. Usually a department supervisor verifies that work
has been completed by the consultants or at the very least, reviews time sheets
along with summaries of what was performed by each consultant. Having a senior
executive sign off on the expenditure isn't enough. No check should have been
cut without the proper documentation.
I can not understand how 2 large
expense transactions ($27 million and $3.7 million) could have gotten through
even with Kumar personally signing the authorization.
If CA did not cut
a check for the consulting services, then the expenses should not have been recorded
under cash basis. Under accrual basis accounting, the expense could have been
recorded but a follow up within 1 year should have identified that the consulting
services were never rendered and therefore should not have been paid.
firm should always have a clearly defined reporting structure where these problems
can be investigated further. If internal accounting personnel were uncomfortable
about reporting the issues directly to senior management, CA's external auditors
could have been notified anonymously.
Of course, the firm's auditor's
should have used similar audit procedures to confirm the legitimacy of the recording
of sales and expenses.
2005 Nelson Chin.
inquire about consulting or speaking engagements, e-mail: Nelson