Financial Fraud Case Study: Stephen Richards

Financial Fraud Case Study Stephen RichardsTable of Contents decision maker summaryProblem StatementCompany all overviewCase AnalysisQuestionsA letter from prisonExecutive summaryThis case study is close to the former global head of sales Stephen Richards at the calculator Associates, Inc. (CA), who is helping a seven year prison sentence for pecuniary pseudo. In addition to this, Stephen Richards responds to the number of the questions asked by the Eurenge Soltes about the responsibilities of the managers as fountainhead as the handling of the financial activities in a letter written to a graduate student. Moreover, Stephen Richards joined the data processor Associates, Inc. (CA) in the year 1988 immediately afterwards graduating. He has achieved continuous promotions in the come with throughout his sequence gunpoint in the information processing system Associates.As, Stephen Richards gets prompted inside two years time stop consonant after his joining to operate new-s prung(prenominal) Zealands and then promoted to the Australian site of the high society. Stephen Richards becomes the vice president of the Pacific region and is a lede regional figure for the Computer Associates, Inc. (CA). The connection has acquired various competitors as well as firms that ar producing complementary software products during the time duration mingled with 1980s and 1990s.In addition to this, the company has around 18,000 employees and subsidiaries in approximately in 100 countries in the late 1990s. The company recorded its NPVof the licensing contract in the shadower when the tax recognition criteria are met in accordance with the generally accepted accounting principles regulations.Problem StatementComputer Associates International, Inc. (CA) is currently facing the problems related to the financial taradiddle allegements against the company.As, the company finds it more difficult to accurately forecast the taxs as well as earrings for severally get of their sales targets.Company overviewComputer Associates International, Inc. (CA) is founded by the Charles Wang in the year 1976 in found to meet the maturation needs of the mainframe computing software for IBM electronic computers. Moreover, the company offers a manikin of products that include database, application and financial steering software in order to meet the computing necessities of the businesses. The most of the software products are sold by the sales team of the Computer Associates to the clients who buy a indep differenceence to work the product for a degree between three to ten years.Additionally, Computer Associates provides the software updates and technical support to its clients during the period of licensing. The gift of the licensing charged by the Computer Associates to the clients increases with the length of the contract as well as each redundant licensing year was priced lower as compared to the previous year in order to reflect software old ness.The amount of the fee that is charged by the company to its clients could be amounted to hundreds of thousands of dollars. The Computer Associates distri neverthelesses the revenue enhancements to licensing fees as well as to usage and maintenance fees once the contract of the demonstrate between the company and the client is finalized. Mostly the 80% of the revenue is allocated to the licensing fee.The significant part of the company revenue is normally booked during the final week of the shite. During each quarter the management sets internal sales targets for the sales team with the sales incentives are disposed(p) to the immune pressure to meet these sales targets. The company showed huge addition during the 1990s, even with the challenges and pressures.Case AnalysisThe case analyzes the overall situation of the Computer Associates International Inc. (CA) related to the allegation about the financial snake oil within the company by a few executives of the Computer Ass ociates. The management of the company found it hard to forecast accurate results for the revenues and net for each quarter in the year. As, to begin with the end of the quarter, the management of the company found it incapable to warn the specialists about the unexpected shortfalls in the revenue.Additionally, the various larger contracts resulted in the shortfall in the revenue of the companys products as these contracts are those that are close on the final day of the quarter. Due to the decline in the revenue of the Computer Associates affected the downslope price of the company that reduced the Computer Associates stock by 42%.There is an allegation about the company that is published in an article in the New York Times, and harmonise to this, Computer Associates have excessively implemented the approach of ravening accounting practices in order to boost the earnings. But there are several evidence that proves that all the accounting practices of the company are accordin g to the generally accepted accounting principles.This allegation also gets the attention of the national investigators who showed dissatisf challenge with the internal investigating of the company. Due to this allegation the company has faced lots criticism that greatly impact the standing of the Computer Associates (CA) and requires other slipway to make investigation done efficiently so, the company hire the prestigious law firm in order to investigate more aggressively.It is refractory from the investigation that the few employees of the Computer Associates (CA) had backdated the some of the contracts as well as it also appeared that the revenues related to such contracts had been recognized after the end of the quarter. While, the revenues coupled with these software contracts must be recognized in the in the quarter in which the contract has been signed.Therefore, the three executives of the company are forced to get out the resignations delinquent to this improper rev enue recognition. In addition to this, six executives on with the Richard are caught to be involved in the financial fraud due to which Richard the SEC filed a formal complaint against the Richards and at the same time he resigned from the Computer Associates International Inc.QuestionsHow serious were Stephen Richards actions? Why?Stephen Richardss actions were super seriousRichard in his letter writes that his self and the CEO exerted significant pressures on their team to meet the goals that they had set for themselves also Richard mentions that proceeding was measured by internal goals Stephen Richards actions are nonably serious because he had acquaintance of the wrongdoings and he was in a position to report it, but he chose not to. Richards action together with other CAs executives hard victimized the shareholders as they suffered enormous losings once the practices were revealed. Therefore, Richard was ordered to turn out $29 gazillion in restitution. (Weidlich)manip ulating Computer Associates quarter end cutoff to align CAs reported financial results with market forebodings by violating the generally accepted accounting principles and their financial reporting responsibilities. According to the U.S. Securities and substitution Commission, Richards with other CA executives extended CAs financial quarter, instructed and allowed subordinates to bring off 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 quick CAs Finance or Sales Accounting part that CA salespersons that reported to Richards were obtaining contracts with backdated signatures dates after quarter end. (Release)in accordance with the expectation set by outside parties, analyst community, specifically to meet environ Street quarterly per-share earnings estimates, a key to keeping a companys stock price rising.Richards with the CEO allegedly met routinel y and conferred with each other and with (CFO) during the week following the end of pecuniary periods, including during the insolent period, the three business days after the end of fiscal quarter, to determine whether CA had generated sufficient revenue to meet the quarterly projections, and closed in(p) CAs books only after they determined that CA had generated rich revenue to meet the quarterly projections, this practice, which was sometimes referred to within CA as the 35-day month or the three-day window, violated GAAP and resulted in the register of materially false financial statements. The goal of the 35-day month was to permit CA to report that it met or exceed its projected quarterly revenue and earnings when, in truth, it had not. (DOJ) Referring to the Scheme to Defraud, Richard instructed CA sales managers and salespeople to negotiate and finalize additional license agreements, which were backdated to cover the fact that the agreements had been finalized after the end of the fiscal quarter.At the end, these actions led to overly aggressive accounting practices to boost CAs reported earnings and the managerial use of discretion to greatly catch reported earnings was not only used by Richards, but it had become a company-wide practice. As Mark Director of the SECs Northeast Regional Office, said about CAs fraud Like a team that plays on after the final let the cat out of the bag has blown, Computer Associates kept scoring until it had all points needed to make either quarter look like a win. (Wharton)As the result, CA fraudulently recorded and reported in the earlier quarter revenue associated with the backdated agreements. Stephen Richards 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. Richards action together with other CAs executives seriously victimized the shareholders as they suffered enormous losses once the practices were revealed. Therefore, Richard was ordered to pay $29 million in restitution. (Weidlich)2. If Computer Associates achieved the same financial results through GAAP flexibility, does your repartee to question 1 change?No, with the flexibility of GAAP the risk of enjoyment was that CA could have more likely made reporting misunderstanding that would lead to legal problems and enormous losses. As long as the CAs executives including Richards had the intention of wrongdoing actions they would cause massive losses to the shareholders of the company and to the SEC. Though such manipulations and fraud resulted CA to payback $225 million for the purposes of compensating shareholders for losses arising out of the companys criminal conduct. (DOJ) Seeing that, the evidence and investigation on Computer Associates shows that the CA didnt make false consummation and actual transaction and business deal had happened, but the problem of fraud was that CAs executives were backdating the agreements in order to prematurely rec ognize revenue from contracts that had not yet been executed by both CA and its customers in violation of GAAP.Under Generally Accepted Accounting Principles (GAAP), four conditions were undeniable to be met in order for revenue associated with a software license agreement to be recognized 1- persuasive evidence of an arrangement was unavoidable to have existed, 2- delivery of the licensed products was needed to have occurred, 3- the license fee was required to have been fixed or determinable, 4- the collectability of the license fee was required to have been probable.3. Suppose you were placed in Stephen Richards position at computer Associates and were under pressure to extend the fiscal quarter. How would you handle the situation other than? What would be the expected consequences?I would not have extended the fiscal quarters of knowingly or encourage the backdating of agreements, regardless of the overwhelming pressures by the Wall Street estimates which Richard points to ana lyst community in his letter. CA on a regular basis issued public predications at the outset of each fiscal quarter of the revenue and earnings it expected to earn during that quarter. Based on these predictions, professional stock analyst estimated what they believed would be CAs total revenue during the period and predicted the earnings per share of CA stock. CAs executives including Richards unders withald that CAs failure to meet or exceed the consensus estimate for a quarter would likely result in a substantial falling off in the companys stock price. (NY) I think too more emphasis was placed on the achieving financial gains improperly, for Richards and other members of management, without be after the proper ethical and legal strategy necessary to achieve CAs goals for success.Performance measurement was a key level of fill in this case which alerted the key ingredients for financial statement fraud and fraud triangle. The sales managers and salespeople were used as enable rs to negotiate and finalize additional license agreement while keeping the accounting books open after the end of the fiscal quarter. Richard also emphasizes on the compensation is important, but the recognition of your performance is sometimes even more important.Actually, according to Richard in his email he writes that we have created a performance driven culture without the necessary tame framework for people to operate within this shows that there was no genuine structure as far as milestones for growth. That is how CA pushed as much as to reach its goal of estimated earnings regardless of considering any find out or regulation type of culture attitude, which led CA to tragic results relating from poor decision making and lack of organizational structure and control. instead CA could have placed better accounting controls to recognize and issued possible and accurate public predications at the outset of each fiscal quarter of the revenue and earnings it expected to earn d uring that quarter, this way they would have not faced the legal troubles that they led themselves to. Even in such a situation for a healthy company to minimize the risk of this downward(prenominal) slide is encouraging and protecting whistleblowers. That way, problems are addressed internally- well before they become big enough to drag the entire company over the cliff.