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3/2/2006
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From Cooked Books To New Look

All the personnel changes in the world wouldn't turn CA around if its accounting and other wayward business practices were allowed to continue unabated.

As part of its 2004 settlement with the Justice Department and the Securities and Exchange Commission, CA admitted that from 1998 to 2000, it illegally recorded some $2.2 billion in revenue, mostly by shifting sales made in one quarter to a previous quarter in order to "make the numbers." Based largely on those admissions, CA's stock price plummeted, stockholders filed lawsuits, and the company ended up paying $235 million in damages to various parties, including $10 million to billionaire Texas investor Sam Wyly, whose Sterling Software CA had earlier acquired.

Former CEO Sanjay Kumar and former sales senior VP Stephen Richards each face a maximum of 100 years in prison if found guilty of the 10 counts of fraud, conspiracy, and obstruction of justice at their trial, which begins in April. Kumar and Richards sit accused by the SEC of padding earnings between 1998 and 2000, while former counsel Steven Woghin already has pleaded guilty. CA's board is still figuring out how to recoup compensation and bonuses from some of the former executives who benefited from the accounting misstatements, though the company says the Justice Department and the SEC are best suited to press that issue. Stockholders also have filed suits against current and former officers and directors, including Russell Artzt, co-founder and current executive VP of products.

CA drew up a new game plan after the 2004 settlement, which included a "deferred prosecution" agreement and forced the company to embrace new accounting procedures, strengthen corporate governance and financial reporting processes, and set up a compliance and ethics training program. Since restating its financials for 2000 and 2001, the company has hired a chief accounting officer and a chief compliance officer, brought in a new general counsel, and must answer to a government-mandated independent compliance examiner during the 18-month austerity period, which ends in September. If CA lives up to the terms of its agreement with the Justice Department and the SEC, all charges against the company will be dropped.

But it's not just a top-level overhaul. CA has hired hundreds of new people for its legal and finance departments. It also has created compliance hot lines run by a third-party vendor that give any whistle-blower unfettered access to the company's new auditing committee. The new employee training programs lay out what is and isn't acceptable behavior. All salespeople, for instance, now know that "side letters," the kinds of off-the-books sales agreements that got CA into financial trouble in the first place, are verboten. "A large part of compliance is communicate, communicate, communicate," chief operating officer Jeff Clarke says.

The 2004 Justice-led agreement also required CA to implement an ERP system to make transactions and accounting transparent internally and to auditors. The company expects its $100 million SAP implementation to take years, as it ties together thousands of systems and hundreds of homegrown programs. CA will take the first giant step toward a single financial system later this year when it moves its entire North American operations to one general ledger system.

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