The Accounting Fraud Case At Computer Associates

1080 Words Sep 14th, 2014 5 Pages
As requested I have completed an analysis of the accounting fraud case at Computer Associates (CA) in preparation of your speech at the American Accounting Associations annual meeting. I have structured my analysis to correspond to six key questions that arose from the case and Stephen Richards actions while Head of Global Sales at Computer Associates.
How serious were Stephen Richards’ actions? Why? Stephen Richards’ actions were plain and simply criminal, and therefore very serious. Richards used his position of power as the Global head of sales to compel clients into boosting sales earnings by quarter. And ultimately this led to "overly aggressive accounting practices" to boost their reported earnings. It was well known to CA’s
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How? As stated in Exhibit 3, Earnings management is the managerial use of discretion to influence reported earnings. Within the accrual accounting system, managers have significant discretion with their firms’ accounting choices. Management has the ability to make choices that can opportunistically lead to higher or lower reported earnings. Richard 's and Ira Zar’s (CFO) actions would not change if these results were the result of GAAP flexibility because he violated the rules of accounting, the conceptual framework principle of neutrality in numerous ways to report the financial results that CA did under false pretenses. It would be one thing if CA garnered these results through legitimate business decisions versus using accounting tactics like changes in accounting estimates or outright fraud as in the use of the 35 day Month. The purpose of which was solely to allow CA to meet or exceed analysts’ estimates.
Does it matter what your competitors are doing? Step back and consider management’s incentives and choices. What is the motivation to manage earnings?

Ultimately it should not matter what your competitors are doing from an accounting perspective, but during the late 1990’s and early 2000’s stock analysts were the most influential members of external stakeholders, even more so that the institutional investors and it was their estimates that drove many of CA’s business decisions and aggressive
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