1. How serious were Stephen Richards’ actions? Why?
2. If Computer Associates achieved the same financial results through GAAP flexibility, does your answer to Question 1 change?

3. Does it matter what your competitors are doing?
 
 
 

 
 

Computer Associates International, Inc. (CA) began as a four-person start-up in 1976. Its founder, Charles Wang, sought to fill a growing need for mainframe computing software for IBM computers. Computer Associates offered a range of products, including database, application, and financial management software, to fulfill the computing needs of businesses. In 1988, soon after graduating from Avondale College in Australia, Stephen Richards joined CA's Sydney office. Within two years, Richards became manager of the Brisbane sales office. Richards impressed management, soon receiving a promotion to run the New Zealand office and then, two years later, the Australia office. By 1995, Richards was a leading regional figure for CA as the senior vice president of the Pacific region. Richards' rise at CA paralleled the rapid growth of CA as a firm. During the 1980s and 1990s, CA acquired numerous competitors and firms producing complementary software products. By the late 1990s, CA had almost 18,000 employees and subsidiaries in nearly 100 countries. In April 1999, Richards caught the eye of CA President Sanjay Kumar and was promoted to lead one of Computer Associates' North American regional offices with over 3,500 employees. Soon after, in April 2000, Richards was promoted to global head of sales. Richards' growing responsibility and success was rewarded accordingly with a half-million dollar base salary and generous option compensation. For most software products that the CA sales team sold, clients purchased a license to use the product for a period of three to ten years. During the licensing period, CA provided software updates and technical support. Fees increased with the length of the contract, although each additional year of licensing was priced lower than the previous year to reflect software obsolescence. With even a small contract, the fees could amount to hundreds of thousands of dollars. When a license contract was finalized, CA allocated revenues to licensing fees and to usage and maintenance fees. Normally, at least 80% was allocated to the licensing fee. Under Generally Accepted Accounting Principles (GAAP), revenues from software licensing were recognized once a contract was signed, the software was delivered, and payment was reasonably assured. Once these three conditions were met, a software firm could recognize the entire value of the licensing fee as revenue. In accordance with GAAP, CA recorded the entire present value of the licensing contract in the quarter when the revenue recognition criteria were met. The immediate recognition of the entire value of multi-year software licenses in the quarter the contracts were finalized created numerous challenges for CA management. One analyst noted that "customers learned, or were advised by consultants, that the later into a quarter they waited to sign a contract, the more likely they were to get a better deal (bigger discounts, extended payment terms, free services, etc.).... Moreover, the bigger the deal, the more likely that the prospect would use such