Accounting Fraud Case Study

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- Ethical Issues

Computer Associates’s General Counsel, Steven Woghin was enlisted to examine the allegations. Preliminary discussions with individual managers and the available documentation did not seem to support to against the firm. He was disrupting the investigation by hiding documents. However, in July 2003, Federal investigators expressed dissatisfaction with CA’s internal investigation of the allegations. Faced with this criticism, CA’s board hired the prestigious law firm Sullivan & Cromwell to investigate more aggressively. Woghin was providing the attorneys from Sullivan & Cromwell with twenty-three boxes of documents that were originally missing which probably have information about the illegal earning management that CA do. He misleads the investigation by hiding the documents. Despite his intention to cover and help the company to survive but the way he help is wrongdoing. Woghin as a general counsel supposedly follow the law and regulation but he against the laws even thought his intention is to help the company.

Within three months of the investigation, the team of investigators from Sullivan & Cromwell has found sufficient evidence to implicate the firm’s CFO, Ira Zar, facilitating the backdating of some contracts. Besides that, two of his subordinates also involved in facilitate the backdated contract. Ira Zar as CFO, he should applied with GAAP as mention earlier which is revenue were recognized once the contract was signed, the software delivered, & payment was reasonably assured. But, he more focus on the earnings to pay high dividend for the holders, he against the GAAP. Then, the two subordinate supposedly have their own choices when their top management ask them to do something unethical. They should leave the job or be a whistle blower event it’s risky.

Richards, as a global head of sales at Computer Associates, facilitated the extension of the fiscal year, allowed subordinates to obtain contracts after the quarter end, and failed to alert the finance and accounting departments about contracts that have been backdated. The misreporting affected the revenues and earnings during the 2000 and 2001 fiscal year. Supposedly, he should alert the finance & accounting department once he knows about the wrongdoing.

- Poor Internal Control

In this case, we realized that poor internal control contribute toward the earning management issue that happen to be in Computer Associate International In (CA). Found that a number of contracts appear to have been signed after the end of the quarter in which revenues associated with such contract had been recognized prove that this company did not take into consideration about the important of authorization. Since CA is seen as a big well established company, this problem appears as the main weakness and carelessness of the company. The company cannot just pass all the work to subordinate without any control and authorization. Lack of control activities can lead toward abuse of power and also can produce the workers that dare to broke the rules since rules are meant to be broke.

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- Failure of auditor in detecting fraud

In this case, the cause of which is indirectly closely related to earnings management was the auditor KPMG LLP failed to identify or detect fraud in Computer Associates (CA). As we know KPMG is one of the Big Four auditors. KPMG LLP has confirmed that the financial statements were presented by CA in all respects and fully in accordance with GAAP. CA appointed KPMG as auditor of the company can convince their shareholders that their company free from any fraud. This is because KPMG is the auditor of the popular and respected. That is good for keep trust from their client. The failure of KPMG to detect the fraud at the early stage has contributed more earnings management in CA as the top management of CA thought they were acting legally and doing the right thing. In other words, if KPMG has detected this problem early, CA will able to correct their actions and not convicted to any lawsuit.

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4.0 Decision Criteria and Alternative Solutions

- Hire a CEO and change the management team

The existing management team needs to be replaced. Firstly, CA needs to hire a new CEO to carry out reorganization. CA should hire a prestigious CEO that has qualified experience in the same field. For example, CA can hire a former CEO from the world famous company such as IBM. Generally, a newly appointed CEO will change the management team with his own management team because the loyalty to the former CEO might obstacle the execution of the planning made by the new CEO. The existing management team might put the blame on the Security Exchange Commission (SEC) instead of realizing the mistake they made. They tend to stick to the old reporting method and reluctant to change their working methods. Therefore, hire a new CEO and his management team is the best way to change the organization culture and their working attitude.

CA can gain many benefits by hiring a new CEO and changing the management team. Firstly, it is easier to build a new culture in the workplace with the new CEO. CEO is the one who set the tone at the organization, therefore he needs the management team and the personnel to work with him in the new culture. However, the existing management team might reluctant to change their attitude just like a leopard cannot change his spots. So, the management team must be changed to cope with this problem. Besides, it can help to reinforce the confidence of the shareholders. The shareholders have lost their confidence and trust in CA. Therefore, a new prestigious CEO is needed to convince them to continue their investment in CA. In addition, the new CEO can lead CA to the right pathway. The new CEO is the key person in making the changes and directing CA to a better and successful prospect. CA is able to improve its sales without compromising the rules and regulations.

The biggest drawback on this solution is the cost of replacing the entire management team in terms of time and money. It is not easy to change the management team as it incurred on time to select the right person to fit in the position. Furthermore, the newly appointed CEO and management team might take months or years to fully understand the operation of CA. The plans made by the new CEO might take years to succeed. It becomes worsen if the selected CEO doesn’t