Federal prosecutors have opened a preliminary inquiry into whether software company Computer Associates deliberately overstated its profits to inflate its stock price and enrich its senior executives, the New York Timesreported today.
Since October 2000, the software company has reported its financial results using a nonstandard "pro forma" accounting practice that makes its profits and sales seem much larger than under standard accounting rules, the New York Timesarticle said.
The company also continues to report its results under regular accounting rules. But because of a change Computer Associates made in its contracts when it began using pro forma accounting, the standard results are essentially meaningless for investors.
Former employees have said that Computer Associates began using pro forma accounting because it had run out of ways to inflate its results under standard accounting rules and had to find a new method, the article claims.
Computer Associates issued a statement today in response to a similar report by the Long Island newspaper Newsday, in which the company said it had not been contacted by the authorities regarding any investigation, and did not know what, if anything, was being investigated.
Newsdaysaid investigators are looking into whether the company has properly distinguished between revenues it receives from the sale of software and the fees it charges to service, upgrade and maintain those software products.
"The reporting of our financial results has always been in accordance with all applicable accounting principles," the company statement said.
"If there are questions, we look forward to being contacted and to having the opportunity to defend against hearsay and what we believe will prove to be unwarranted concerns," the company added.
The collapse of Enron has resulted in new scrutiny of unusual corporate accounting methods.
Since October 2000, Computer Associates, a giant software company based in Islandia, NY, has reported its financial results using a nonstandard "pro forma" accounting practice that makes its profits and sales seem much larger than under standard accounting rules.
The company also continues to report its results under regular accounting rules. But because of a change Computer Associates made in its contracts when it began using pro forma accounting, the standard results are essentially meaningless for investors.
Former employees have said that Computer Associates began using pro forma accounting because it had run out of ways to inflate its results under standard accounting rules and had to find a new method. The company has denied those accusations and says that its accounting was and continues to be proper.
The preliminary inquiry is being conducted by David Pitofsky, an assistant United States attorney for the Eastern District of New York, which oversees Long Island. Mr. Pitofsky could not be reached for comment, but a person whom he contacted said that he had asked about the company's sales and accounting practices and whether it had overstated its sales and profits.
The person said Mr. Pitofsky appeared interested in setting up interviews with the F.B.I. for former Computer Associates employees but did not indicate whether he planned to issue subpoenas.
The company could not be reached for comment.