CA accounting procedures under scrutiny

Executives at Computer Associates International Inc. last week defended the company's new accounting procedures, even as the firm's stock plummeted after a negative article about the changes appeared in the press.

Last week, CA said its financial reporting methods, attacked in an April 29 article in The New York Times, are sound and aren't an attempt to obfuscate real earnings. Islandia, N.Y.-based CA prepared a press release responding to the Times' claim that, based on standard accounting procedures, CA's "sales have fallen almost two-thirds over the last six months" and that it's using a new financial reporting system, started last October, as a smoke screen to cover it. The newspaper based its conclusion on CA's April 16 preliminary fourth-quarter results announcement, in which CA stated its revenue would be US$732 million, a decrease from the previous year's $1.9 billion.

Although CA had reported on a pro forma/pro rata basis annual revenue of $1.44 billion, up from last year's $1.39 billion, the article shook up investors enough to cause the firm's stock to plummet by more than 11 percent on April 30. In a press conference that same day, CA President and CEO Sanjay Kumar defended the numbers and said the Times hadn't fully taken into account the use of the new accounting model, which books the value of a contract incrementally on a monthly basis; previously, CA had booked the full value of such contracts upfront. Kumar said the newspaper overlooked the fact that under the new model, CA had also reported $1.3 billion in "residual value," or backlog, which isn't considered revenue.

Several analysts maintain that the dispute amounts to a half-empty/half-full water glass conundrum.

Both sets of numbers that CA uses are useful to evaluate its performance, said Chris Mortenson, an analyst at investment bank Deutsche Banc Alex. Brown Inc. in New York. While the changeover in accounting methods should make observers cautious, there is "nothing in it to lead any analysts to believe they're cooking their books," Mortenson said. The company's cash flow has been strong, and that's the key metric to evaluating a firm's health, he said.

Either way, the dispute won't affect CA's enterprise users, said Richard Ptak, an analyst at Framingham, Mass.-based consultancy Hurwitz Group Inc. It's just an "accounting dispute," Ptak said.

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