A Letter from Prison Case Study

Early 2000s witnessed a series of large-scale accounting scandals involving corporate frauds and misrepresentations, which when unveiled led to the collapse of world-known public companies. WorldCom, Enron, Adelphia, Arthur Andersen, One.Tel - all fell prey to misdeeds of top-level executives who utilized loopholes in the existing laws and accounting standards for the purpose of personal benefit. However, the boundary between the uses of certain discretion implied in frameworks and the fraudulent accounting which violates GAAP is very subtle. Many of those who found themselves on the footpath of “creative accounting”, were later charged with serious offences and sentenced to prison. The case of Computer Associates is one of those where poor corporate governance, sales-driven culture and performance-based remuneration multiplied by the constant pressure from the stock market resulted in a big lawsuit, losses for the company and jailed executives.

Question 1.

CA Technologies, Inc., formerly known as Computer Associates International, Inc. is one of the world’s leading software companies, providing for businesses’ computing needs. Stephen Richards started his career with CA in 1988 as a telephone support technician and got rapidly promoted in line with the company’s growth until he became a global head of sales in 2000. CA prospered and was on the Fortune magazine list of top 500 largest US corporations during the late 1990s and early 2000s (Fortune 500 2012), until the legal proceedings were brought against the company by the United States Securities and Exchange Commission (SEC) in 2003.

In his interview to New Zealand Herald (After Long Months, It’s Long Years 2007) Richards noticed that CA’s culture was very sales focused and the remuneration was performance-based. That is, sales force received additional bonuses when they reached the planned sales level and executives, apart from base salaries, were granted options to buy company’s shares. In late 1990s the...