Computer Associates International Inc. Case Study

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If competitors were using some methods to manipulate the earnings management and they had great annual income, Richard would be very aggressive to try this way. If not, his position and efforts would be challenged by other employees. Obviously, if all the enterprises start to use this method to manipulate their earnings, the whole market economy and competition will become a disaster.

Earnings Management

When the executives in the preparation of financial reports and the construction of economic transactions, they will use their judgment to alter financial reports to mislead some stakeholders to understand the company's fundamental economic benefits, or effect the final financial results in the report in order to produce the earnings management.

Motivations

- The basic purpose of earnings management by the enterprise management authorities is to obtain and maximize their own interests. There are many aspects of their own interests, in general, the executive management will implement the earnings management in the returning of the capital market, management buyout, signing of the contract and government policy.

- The management level will use the earnings management to attract investors and protect the interests of shareholders. And if they want to implement this action, the earnings management will be the best way to improve the value of enterprise.

- The stock option schemes. CA’s executive managers wanted to manipulate the earnings in order to gain more benefits from the stock option. Seriously distorted management system provided an incentive mechanism of a huge reward. CA’s executives became more aggressive to implement and manipulate the earnings management.

- Another motivation of earnings management is that the interests of the executive management level and stakeholders are not consistent. The executives will implement the earnings management for their own benefits. In addition, from the perspective of accounting, the existence of earnings management and the accrual basis of accounting principles are related.

ANALYSIS

In this case, the factor is that CA recognized future quarter revenue in the current financial statements, which will make financial statements look more profitable. And it will attract more investors to invest their money in a period of time. In my opinion, CA does not follow the GAAP and lies to the investors and shareholders about the real statements. Even though the Richard said that it is a widespread method that lots of company attract investor or motivate employees in this way. And company thought that they are doing the right way to make it better. But by looking at the wrong financial statements, strategy or adjustment is going to make incorrectly for sure. However, they will be an unhealthy competition in the market if they keep to use this method and compare their revenue to competitors.

Richard is the one who watched all these happened and he was not care about this while mentioned in the latter. He should tell all accounts to make the right financial statements even if the performance is not looking good. Because the financial statements ire the reports for company’s operation in this year. It should be real. And company can make right decisions and strategies. Without the warning gave by Richard, accounts may have cross the line between legal and illegal.

SUGGESTIONS

If I am a Stephen Richards, I would tell my financial department correct the improper recognition of revenues and make the right financial statements, which might show the bad performance. But it could truly present the company’s condition. I would ask auditors to check the financial statements carefully for every detail. And the investors and shareholders look real financial statements and not attract to them. I will communicate with them, help them to know our company better. Rather than give them the financial statements and leave them make decision alone.