The Accounting Fraud Case At Computer Associates

Stephen Richards’s actions were extremely serious; manipulating Computer Associates’ quarter end cutoff to align CA’s reported financial results with market expectations by violating the generally accepted accounting principles and their financial reporting responsibilities. According to the U.S. Securities and Exchange Commission, Richards with other CA executives extended CA’s fiscal quarter, “ instructed and allowed subordinates to negotiate and obtain contracts after quarter end while knowing, or recklessly 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

When analysts question a firm’s earnings quality, it raises concerns regarding under or over aggressive accounting practices that may be allowing the firm to manipulate the earnings. Earnings quality is defined as the strength of the current earnings in being used to predict future earnings and cash flows. Since earning quality is indicative of future performance, analysts are more likely to address issues that have substantial impact on the earnings quality. An issue arises when the nature of the earnings is questioned. While permanent earnings are part of normal operations, any irregular, one time earnings can skew the earnings, making the firm look more profitable than it is. This is due to the inability to recreate similar one-time transactions that will give rise to such numbers. Investors prefer predictable

Understandably, there are a variety of ways in which a company can manage their earnings, and if accomplished successfully, the results can be highly profitable. Not all techniques are fraudulent, as effective earnings management is considered good for business and shareholders. Income smoothing is a specific example of permissible earnings management that involves controlling fluctuations in net income to make earnings less variable over a given period of time (Goel & Thakor, 2003). Smoothing is acceptable as long as it adheres to the restrictions of U.S. GAAP, which maintains that all revenues and expenses are accounted for in a defined fashion. There are a lot of incentives in figuring how to effectively smooth income, as substantial value can be created through the successful arrangement of financial transactions. Management is able to make more intelligent decisions with regards to the future of the firm if the earnings are able to match the forecasts. One instance this is seen is when management is faced with the decision to smooth total income or

Such an intense focus has been placed on quarterly earnings as an indication of a company’s success by everyone from analysts to executives that ethics have for the most part been thrown out the window, sacrificed to the all important number, i.e. earnings per share. This is the theory in Alex Berenson’s book “The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America.” This number has become part of a game to be played, a figure to be manipulated – beat the number and Wall Street all but throws a parade, miss it and a company’s stock may be abandoned. Take into account the incentives that executives have to beat the number and one can find plenty of reasons to manage earnings.

The first possible motive of the management is to hope to raise more capital as a result of increase in company’s stock price. It is widely known that stock price is an appropriate indicator of how a company performs financially since market is perceived efficient. Based on the company’s recent struggle in its financial performance, it is understandable that the management’s priority is to come up with a means to turn the financial situation around as soon as possible. By making aggressive accounting policy changes, the company would report profits in the financial statement so that the stock price tied to company’s financial performance might increase, resulting in the potential raise in capital. Hence, it is reasonable why the top management made the decision to change its accounting policy.

This case study is the first of a two-part Earnings Management Case. The purpose of Part

Earnings management is the use of accounting techniques, such as change in accounting policies and accounting estimates, with an objective to create an optimistic outlook (sometimes overly optimistic) of a company’s business activities and financial position. Although to some it may seem like it is earnings fraud, earnings management actually took benefit from the flexibility and the legitimateness (within the framework of Generally Accepted Accounting Principles (GAAP)) of accounting rules to manipulate revenue and expenses recognition.

Seventy Nine Percent of those surveyed asserted that it was ethical to change or manipulate operating procedures or decisions if the effect was a reduction of earnings. Only 57% believed this was ethical if the effect was an increase of earnings. One corporate controller admitted to paying overtime and shipping on a Saturday in an effort to increase sales. (Bruns, 1990) Managers who engage in practices that boost short-term earnings are often acting in accordance with the laws. However, they are not looking at the effects their actions have on the financial reports. This, in essence, ignores the needs of

Management’s ability to manage the earnings in the long run is that they will not have any earnings in the long run if the type of manipulation that is going keeps occurring. The quote from one of the examples, “On accounting manipulations, a profit center controller reported: Accounting is grey. Very little is absolute…You can save your company by doing things with sales and expenses, and, if it’s legal, then you are justified in doing it,” (Gibson, C.H. 2011). This speaks volumes that these type of people don’t care about the true bottom line all they care about is finding a way to manipulate it. In the long term you will effect everything what you do in the short term. The other example would be the following: “Last year we called our customers and asked if they could take early delivery. We generated an extra $300,000 in sales at the last minute. We were scratching for everything. We made our plans, but we cleaned out our backlog and started in the hole this year. We missed our first quarter sales plan. Will catch up by the end of the second quarter,” (Gibson, C.H. 2011). This shows that if you change that

Industry operating margins falling – fell by 7% in 3 years to 4% in 1989. Industry profitability is therefore decreasing which increases competitor rivalry

Accountants cannot predict every business structure, every new and innovative transaction. Therefore, they build up principles that allow for flexibility so that they can adapt to changing circumstances. However, people make use of that flexibility. They employ earnings management techniques to shade financial unpredictability. Thus, the real results of the decisions of the management are veiled.

The Sarbanes – Oxley Act of 2002 (SOX), Section 404 plays an important role in a firm’s earnings quality, reliability and relevance (Singer & You, 2011). Additionally, they stated that the implementation of the regulation helped firms reduce intentional misstatements and contributes to the earnings reliability. During the process of evaluating the quality of earnings, there are some warning signs that should be considered, in order to detect potential fraud or misstatement. These warning signs will be discussed further, later in this paper. First, the quality of earnings will be discussed. Second, the analysis of a major corporation to measure its quality of earnings. Lastly, warning signs will show vulnerable areas where financial data can be manipulated. Prior to the measurements of quality of earnings, there are two definitions that should be recognized; earnings quality and earnings management.

The field of Forensic Accounting has seen a remarkable growth in the last decade. This growth is due in part to the many high profile accounting scandals like Enron, Arthur Anderson, and Bernie Madoff investments (Shinde & Poznic, 2010, p. 1). This paper intends to highlight the effect that forensic accountants has on fraud cases, specifically securities fraud. According to the Merriam Webster dictionary fraud is defined as “an act of deceiving or misrepresenting.” This paper is meant to address how the ineffectiveness of forensic accountants can lead to them being held legally liable for their client’s

3. This case introduces some lawsuits for Andersen from its clients, such as BFA, Sunbeam, Waste Management, Enron, and Worldcom. Those proceedings had a huge negative influence on Andersen, specifically Enron's, which is deadly strike. 4. In the end, Andersen agreed to cease auditing public corporations by the end of August in 2002, essentially marking the end of the ninety-year-old accounting institution. At the end of this case, Andersen has received his well deserved punishment. What is more important, Who was the mastermind making so much fraud? Maybe it’s just some people’s faults. However, the main reason is from its degenerative corporate culture that places great emphasis on placing huge profits ahead of ethics and laws. Unfortunately, the life of staffs in the accounting firm were affected pessimistically by all of the events associated with this case. Furthermore, this ethical misconduct caused the loss of the public. Accordingly, no matter who we are, the CEO, the CFO or employees, we should keep something in mind that accounting ethics is significant not only for everything and everyone in the company but also for the

The factor is that, as mentioned before, CA recognized future quarter revenue in the current financial statements, which makes the statements look more profitable. It could possibly attract more investors in a period of time. However it also cloud the investors and shareholder’s mind to get a true picture of the company. In my opinion, CA is not following the GAAP and obviously lies to its investors and shareholder about its true sales within the quarter. Though mentioned by Richard, it is a widespread method that a lot of company which will attract investment or maybe also motivate the employees, the company was doing the right thing to move itself forward. By looking at the wrong financial statements, strategy or adjustment is going to be made incorrectly for sure. Meanwhile, there will be unhealthy competition in the market if organizations start to use this method and compare their revenue