Computer Associates International (CA) said Monday it has received notice from the U.S. Securities and Exchange Commission (SEC) that the agency is considering civil enforcement action against the company for possible violations stemming from improper revenue recognition.
CA, one of the industry's largest software vendors, has been the target of a joint SEC and U.S. Department of Justice (DOJ) investigation for two years, following reports that the company manipulated its accounting to mask slowing sales. CA, based in Islandia, New York, revamped its business model and accounting structure in late 2000 to recognize licensing revenue gradually, rather than all at once when a contract is signed. The change makes CA's financial results more transparent and predictable, the company said, but it also made comparisons to earlier quarters difficult.
CA's board has been conducting its own investigation into the company's past accounting practices. Three top financial executives, including CA's chief financial officer, resigned in October after preliminary results from that investigation showed that CA booked some sales prematurely during its fiscal year ended March 31, 2000.
CA said Monday it has received a "Wells Notice" from the SEC. The notice provides the officers of a company under investigation with an opportunity to submit to the SEC written statements explaining why an enforcement action should not be brought.
A CA spokesman declined to comment on when the company expects to respond to the SEC.
One financial analyst tracking CA said she views the Wells Notice as the logical next step in the ongoing investigations. If any criminal charges are filed against CA, they'll come from the DOJ, which does not provide information on its ongoing inquiries, said Sarah Mattson, an analyst with RBC Capital Markets.
Mattson, who maintains a neutral rating on CA's stock but cites it as carrying above-average risk, said she does not have any current concerns about improper accounting at CA.
"I think it's fairly transparent in the sense that it's more difficult to double-book revenue," she said. "There's still difficulty in taking apart the revenue to understand what's driving various components, but as far as any irregularities, I don't think that's a problem."
Shares of CA (CA) dropped 2 percent, to US$27.48, in early trading Monday on the New York Stock Exchange.