"I joined Computer Associates with good intentions. I should have walked away."
So said former Computer Associates (NYSE: CA) executive David Rivard earlier today as he entered a guilty plea in court to charges that he helped defraud investors by backdating contracts valued in the hundreds of millions of dollars. Rivard, the former vice president for finance at CA, becomes the highest-ranking official from the company to date to make that special walk to the inside of a courtroom and 'fess up to a judge. It's expected that Ira Zar, the former CFO of the firm, and David Kaplan, a senior vice president, will also plead guilty to similar charges today.
A prosecutor in the case has called these pleas substantial developments in the government's investigation into the accounting practices of the firm during the 1990s. Rivard is expected to cooperate with the government in making its case against other officials at the company, so he could receive a sentence substantially lighter than the maximum of 10 years.
The SEC followed up today with charges against the three men, and has claimed that CA recognized prematurely more than $1.4 billion in revenues in 2000 from contracts that had yet to be signed. Man, if I could make up numbers like that, maybe my stock price would do as well.
Systematic schemes to front-load revenue have the impact of making business seem much better, more robust than it actually is. Since many investors simply focus on a company's ability to "beat the number," it makes jimmying with longer-term contract revenue recognition quite enticing. The trouble is that when you've stolen earnings from the future to make good today, eventually that very same future arrives and you must either report depleted earnings, or you must steal more earnings from the future. As CA was taking the extremely risky election to recognize revenues from unsigned contracts, this suggests that the company was at a fairly advanced stage of its development. That's not exactly what you'd call "step one" of the big revenue-propping scheme.
But, as Rivard has found, following folks like Dynegy's (NYSE: DYN) Jamie Olis, Enron's Fastows, and the WorldCom folks, these things snowball, generally into something much less pleasant than, well, a snowball.
Bill Mann owns none of the companies mentioned here.
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