A Letter from Prison

Summary

Computer Associates (CA) was one of the largest software companies in the United States. They grew quickly with aggressive sales tactics. The aggressive culture laid the foundation for illegal and unethical revenue recognition. Instead of recognizing revenue in the quarter it was realized, CA leadership engaged in the practice of backdating contracts to inflate the earnings for the quarter in order to meet or exceed analysts’ expectations.

Stephen Richards, Global Head of Sales for CA was indicted and convicted for misconduct in financial reporting and misleading federal regulators. While in prison, Richards received a letter from Eugene Soltes, a graduate student at the University of Chicago. Soltes asked Richards a number of questions surrounding the securities fraud at CA and the reasons behind the fraud.

Leadership

Throughout the case, it was evident that Sanjay Kumar and Stephen Richards decided to lead by the expectations of industry analysts. As Richards noted in his letter, analysts do not care about strategy, but execution. The end justified the means was the leadership foundation for CA. Investors were misled and consequently invested money in CA based on erroneous information from inaccurate quarterly earnings statements.

The leadership painted a picture of aggressive revenue growth by backdating contracts. This allowed CA to borrow against future revenue in order to conduct daily activities to deliver current revenue targets. This set analysts expectations higher each quarter, so CA was in a never-ending cycle of misreporting revenues so there would not be a dramatic performance decrease in any one quarter. The leadership blessed all activities and provided lucrative bonuses and incentives to the sales force, which created a culture lacking integrity and pressure to embrace lack of integrity or lose your job.

Culture

The leadership of CA created a greedy culture. The money was good for the employees’ 401(k) and the...