Richard Pamatatau: Black clouds descend on CA

COMMENT

Having followed the progress of US software giant Computer Associates for the last decade and the personalities that have built the company, it's been fascinating watching from afar the black cloud descending on CA's brand and ethical reputation.

Two weeks ago, CA ended an internal probe into accounting mis-practice. As a result it restated US$2.2 billion ($3.6 billion) in sales that it had confidently booked during 1999 and 2000. The US Securities and Exchange Commission (SEC) vultures are also circling and some CA executives may yet face criminal indictments.

Last October CA admitted it had backdated contracts to meet Wall St forecasts for quarterly sales and profits, something some economists say puts pressure on executives to over sell.

CA said it had backdated US$1.8 billion in sales during 1999, almost 30 per cent of its total revenue that year and the restatement moves the money for those deals to later time periods CA was paid in. CA is the world's fourth-largest software company, with 16,000 employees and more than US$3 billion in revenue. It makes software for "mainframes" the giant computers propping up our biggest institutions. Utility systems and anti-virus products are also its game.

CA's New Zealand position is a financial dot, reporting a mere $11 million in revenue for the year ended March 31, 2002, with a profit of only $15,000.

By contrast, CA's new chairman, Lewis Ranieri, said recently that US$30 million had been spent on the internal investigation, a review of tens of thousands of company emails and 1000 licence agreements penned with customers a few years back.

So New Zealand is a mere blip on CA's radar screen. But reputations are global and with corporate governance already having taken a battering, CA joins a long list of companies tainted by accounting scandals that usually reveal that the parties concerned are guilty of one overriding thing - greed.

While the hefty restatement has not changed CA's overall financial results, it must make customers wonder what its dwindling management team was doing while all that bad practice was going on.

At least part of the time, they were preaching the gospel to IT writers at their annual evangelical event, CA World.

Sanjay Kumar, a man who enjoyed hobnobbing with the global A list, resigned as chairman and chief executive after becoming the focus of a federal criminal investigation into suspected securities fraud and obstruction of justice at the company. However he keeps an office at the company in the position of chief software architect and his lawyers say he has done nothing wrong.

Company founder Charles Wang, a flamboyant and suave Asian American, also liked to hang out with the elite.

As to Kumar's alleged wrongdoing - only time and the appropriate investigations will clarify his position.

The restatement has also reshuffled the top layer at CA. Kenneth Cron has been appointed interim chief executive and Jeffrey Clarke elevated from chief financial officer, to chief operating officer.

Stephen Richards, a rising Kiwi IT figure, has also fallen in the scandal. Richards was utterly charming when we first met at a conference many years ago. He said he wanted to go a long way in the company and he did eventually making it to senior vice-president for worldwide sales. Now you can't even find a phone number for him.

Richards is part of the company's "Resignation 15" - the players who kept the dodgy accounting ball in the air. It must be getting hot in there now that the federal and internal investigations are in deep processing mode.

Despite this, chairman Ranieri is playing it cool. "We have no sense of crisis," he said.

The CA debacle may not be an organisational crisis but it undermines trust - ironic for a company touting a product called eTrust which is meant to let companies just run their business and not worry about security.

It's also worth noting the eTrust antivirus product has been selected by the Ministry of Education for use at all 2700 New Zealand state and state-integrated schools for three years. Teachers also benefit from the deal, receiving free access to CA's eTrust EZ Antivirus for their home over the same period. When the deal was announced, CA said it was part of a bid to grow market share.

The next period will be critical for CA, which makes 12 per cent of its revenue from Government business. If top executive are convicted, will Government departments, corporate and private users feel comfortable buying product sold under a "trust brand" when the company's trust is clearly questionable?

Professor John Bishop, Auckland University's acting head of philosophy, said management was an intrinsically ethical activity and not a technique governed by the bottom line or making a profit for shareholders.

"Business ethics have been seen as a contradiction in terms but there is not a very big shift in how business and economics have an effect on the way we live our lives," he said.

Bishop cites the 1987 crash in New Zealand as the first time people in this country began to take note of business ethics and suggested it was time for it to be taken seriously again.

CA's New Zealand boss, Tony Armfield, said he had spoken to his clients and that the feedback had been positive in the wake of the financial revelations.

He also added that while New Zealand revenue for the next year was not up hugely, profit was. The subsidiary had been investigated by its parent.

The New York-based company is not alone in the world of dodgy accounting - witness the performances of Enron or Worldcom and even as recently as 10 days ago, Canadian telecommunications giant Nortel Communications lost an executive over alleged false reporting.

What has become plain is that there are now enough examples to show that trust on the part of shareholders, customers, business partners and the Government can be undermined by the biggest of companies.

Which poses a question for those with their hands on the IT purse-strings - just who can you trust?

* Email Richard Pamatatau.