Backdated Sales Contracts Resurface Years Later

The CFO of software giant Computer Associates was forced to resign, along with two other senior financial executives of the company — and who knows what else now lies in store for those folks — because several years ago the company “held the books open” to recognize revenue for sales contracts signed after the quarter had ended.

According to CA’s press release of yesterday, in the fiscal year ended March 31, 2000, the company took sales into revenue in Quarter X even though the contracts weren’t signed until after the end of the quarter. See also these stories from Reuters, the AP, and Dow Jones.

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CA stressed that the sales in question were legitimate and that the cash had been collected; the issue was one of the timing of revenue recognition. The Audit Committee was still looking into whether the company’s financial results would need to be restated. In the above-cited news stories, outside observers speculated that the company was attempting to position itself to minimize the SEC penalties that were likely to be imposed.

These revenue-recognition problems came to light during an Audit Committee inquiry triggered by a joint investigation by the U.S. Attorney’s office and the SEC. It just goes to show that past sins can come to light years after the fact, possibly as a domino effect of unrelated events.

A May 2001 column, The Fraud Beat, by Joseph T. Wells, in the Journal of Accountancy, has a readable explanation of this so-called “cut-off fraud” and how it can be detected. The column recounts a couple of interesting war stories, including one about a Boca Raton company that programmed its time clocks to stop advancing at 11:45 a.m. on the last day of the quarter. The company would continue making shipments — with the paperwork time-stamped by a stopped clock — until sales targets had been met, at which point the time clocks would be restarted.

As I observed in a previous post, backdating a contract can be perfectly legal in some circumstances, but — as illustrated here — not when it comes to recognizing sales revenue.

It remains to be seen what else will happen to the three former CA financial executives. It can’t be a good thing for their peace of mind that the Justice Department and SEC are already involved.