Free Essay

Mr Richards

In: Business and Management

Submitted By mkamal05
Words 1139
Pages 5
1.How serious were Stephen Richard’s actions? Why?

Stephen Richard's actions in this can be viewed as extremely serious because he used his high position of power in sales to coerce clients into boosting sales earnings by quarter. This led to "overly aggressive accounting practices" to boost their reported earnings. Evidence supported that the managerial use of discretion to greatly influence reported earnings was not only used by Richards', but it had become a company-wide practice. This naturally drew the attention of the DOJ and the SEC as they investigated the potential wrongdoings. Investigators found enough evidence to prove that the former CFO illegally facilitated the backdating of many contracts.

Richards' involvement, as the global head of sales, included facilitating extensions of the fiscal quarter, allowing other employees to obtain contracts after the quarter-end (to boost reported earnings), and he failed to bring to the accounting and finance departments' attention that contracts may have been backdated. Stephen Richard's actions are notably serious because he had knowledge of the wrongdoings and he was in a position to report it, but he chose not to.
1 Alternative: Richards, as the head of the sales at Computer Associates (1) allowed the practice of extending CA’s fiscal quarter to reach the company’s revenue target. He also allowed his subordinates to (2) negotiate and obtain contracts after the end of the quarter ignoring the fact that the revenue for those contracts would improperly recognized by the company and he knowingly failed to alert the CA’s finance and accounting department that the contracts were obtained with backdated signature dates after the end of the quarter.
As a consequence of the above mentioned improper practice, the company found itself misrepresenting and omitting its revenue and earnings. For the first, second, third and fourth quarters of fiscal 2000, for example, CA inflated improperly its revenues by 25%, 53%, 46% and 22%, respectively by including prematurely recognized revenue from contracts that the company signed after the quarter close. The reason of that practice was to meet or beat per-share earnings estimates of Wall Street analysts, a key to keeping a company's stock price rising, but CA made a big mistake when failed to disclose that those reported results included prematurely recognized revenue and thus, did not comply with GAAP.
The most extreme case that occurred in the second quarter of 2000 highlights clearly how the misreporting affected considerably the company’s revenue and earnings, when the company reported $557,7 million in revenues beyond the $1.047 billion that it could properly claim and that made the company report 60 cents (0.60) in earnings per share, beating the consensus Wall Street forecast of 59 cents (0.59) while without improperly recognized revenue, earnings would have been a mere 5 cents (0.05) per share and thus, the stock price might have fallen instead of increased as announced.
2. my opinion on Richard's actions wouldn't really change because he violated the rules of accounting and reporting in numerous ways to achieve the financial results that CA did, under false pretenses. This also brings up morale and ethical concerns that I didn't get into, because I could go on forever! I can only go on the facts of this case and Richard's actions. If the high financial results were realized through honest, legal accounting practices, that would be highly commendable. There really is no such thing as "flexible and legit" accounting practices, but that's just my opinion. The SEC has strict guidelines for a reason, or else every business would make up their own rationale for how they report earnings or close quarters and it would make it difficult to audit and justify any faults with too much flexibility.

4. The motivation to manage earnings comes in part from management’s responsibility to direct the entity’s operations in a way that achieves targeted results. The motivation also comes from pressures on management from sources both outside and inside the entity. External pressures come principally from the capital markets. Many observers believe that Wall Street’s expectations significantly affect both appropriate and inappropriate management behaviors. Members of top management are especially subject to pressures to demonstrate that shareholder value has grown as a consequence of their leadership. Boards of directors are subject to pressures from stakeholders to enhance the value of the entity, and they in turn create internal pressures on management to meet financial and other goals and ensure the growth and prosperity of the entity. Boards oversee the stewardship of management and prescribe the basis for measuring performance and rewarding or penalizing management. Pressures by top management on others at different levels of the entity are everyday occurrences and are a natural part of the performance evaluation process.
6. Suppose you were placed in Stephen Richard’s position at Computer Associates and you were under pressure to extend the fiscal quarter. How would you handle the situation differently? What would be the expected consequences?

If placed in Richard's position at Computer Associates (CA) and the pressures associated with his high-level, high-stress position, I would not have extended the fiscal quarters or knowingly "overlooked" or encouraged the backdating of contracts, regardless of the overwhelming pressures by the analyst community which he writes about in his letter. I think too much emphasis was placed on achieving financial gains quickly, for Richards and other members of management, without devising the proper (and legal) strategies necessary to achieve CA's goals for success. I would have recommended a horizontal management structure, which places a "checks and balances" of sorts on the level of control that top management possesses. Richards' notes in his letter that the board was "too far removed" to know the day-to-day operations of the business. This would be another huge red flag to me that change needs to occur to realign the organization so that all stakeholders are engaged in decision making factors for its daily operations.

Performance measurement also appears to be a key level of concern in this case. There was also no real structure as far as milestones for growth; CA seemed to follow more of a "you're in or you're out" type of cultural attitude, which as has been proved here, can lead to catastrophic results relating from poor decision making and lack of organizational structure and control. Had CA engaged in a horizontal approach, with accountability at all levels of the organization, stronger performance measurements (not based on financial growth alone), and better accounting controls in place to recognize and report any deficiencies, they would have alleviated the legal troubles they led themselves to. The expected consequences would be that it may take longer to reach their financial targets (through slow, steady growth), but top management and other employees would be working towards attaining common goals that do not violate regulations.

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