Sun, CA still looking for answers

Sanjay Kumar, the former chairman and CEO of what is now CA, pleaded guilty to securities fraud, conspiracy and other charges last week, closing the book on a key chapter in an accounting scandal that the software vendor is still trying to put behind it.

But the challenges CA faces as it tries to transform its operations and fully repair its relationships with customers were highlighted by a warning that the company will report lower-than-expected financial results for the quarter that ended March 31. Although CA put much of the blame on the way it is accounting for revenue from recent acquisitions, it also pointed to "a slow bookings start" during the quarter.

John Swainson, CA's president and CEO, said he is confident that the company is on the right track and that the changes made internally since he was hired in November 2004 will have "a beneficial impact" in the fiscal year that started this month. A full turnaround won't happen overnight, though -- Swainson said last fall that it would likely take until 2008 to complete his planned makeover of CA.

Dale Ross, a senior database consultant at Polaris Technologies is a longtime user of CA products. He said CA is taking the right steps on ethics issues in the wake of the accounting scandal. But he added that the company's ability to improve its financial performance and continue to develop useful technologies is still unproven.

"The proof is in the pudding," Ross said. "We hear the CA brass making the right comments. But the question is whether they follow through."

To Ross, Kumar's guilty plea was a positive step toward encouraging appropriate behavior by corporate executives in general. "Once you see guys like Sanjay led away in handcuffs, maybe it will put the fear of God in others," he said.

Kumar and co-defendant Stephen Richards, a former head of worldwide sales at CA, both pleaded guilty to all eight of the counts that they were indicted on two years ago. "I know my conduct was wrong. ... I apologize for my actions," Kumar said at a hearing in federal court in Brooklyn, N.Y., according to a Reuters report.

The two executives admitted that prior to and during CA's 2000 fiscal year, they orchestrated an accounting scheme under which the company -- then called Computer Associates International -- falsely reported hundreds of millions of dollars in revenue during quarters in which the deals that generated those revenues had not been finalized.

For example, the indictment charged that Kumar was flown to Paris on CA's corporate jet in early July of 1999 to negotiate and sign a $US32 million software licensing agreement with a customer. The deal was backdated to June 30, and about $US19 million in revenue was improperly recognized in the quarter that ended that day, prosecutors said.

The goal of the accounting scheme was to ensure that CA would meet or exceed its revenue and earnings projections in each quarter, they added.

The guilty plea "is unfortunate for Sanjay and CA, but it's another example of the pressures from Wall Street on public companies to make their numbers each quarter," said Steve Rummel, vice president of data services at Maher Terminals, a container terminal operator and a former CA customer.

"CA will survive, but it's definitely a black eye for the corporation," Rummel said.

After the guilty pleas, CA issued a statement saying that it is "a dramatically different organization than we were two years ago." In addition to focusing on a growth strategy, Swainson and his management team have set up an organizational structure "that promotes integrity, compliance and good governance," CA said.

Rich Ptak, an analyst at Ptak, Noel & Associates, said Swainson has furthered Kumar's efforts to improve customer relationships and change the widely held view that CA wasn't friendly toward its users. "That old image of CA seems to be in the past," Ptak said.

Kumar and Richards are scheduled to be sentenced on Sept. 12. Both men could face up to 20 years in jail, but the maximum sentence will likely be reduced because of their guilty pleas, said a spokesman for the U.S. Attorney's Office for the Eastern District of New York.

CA, meanwhile, is still subject to a deferred prosecution deal. Under that deal, it agreed to pay $US225 million into a fund for compensating victims of its fraudulent activities and take various steps to strengthen its corporate governance procedures. If CA is deemed to have complied with its obligations after an 18-month period that ends in September, the U.S. attorney will seek to dismiss all fraud charges against the company.

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