1. Below is a interview with Sanjay Kumar, CEO of Computer Associates (April 2001). Point out some red flags or indicators that Kumar may be lying.

Bill Griffeth (CNBC): [...] Before we get to the specific charges, why do you think theses employees would say what they did about your accounting practices?

Sanjay Kumar: Well, I mean, you know, I don't want to play tit for tat with the New York Times, because (unintelligible) somebody who buys paper by the barrel, but let me tell you, there is not a single named named employee sources in there, there's not a single Wall Street analyst named in the article. To me that is just incredible that the New York Times, a paper of record, would write a story like this without talking to a single accounting source, and he talks to tow customers. [....] So I'm not sure where the factual reporting is for the story.

Griffeth: And in the big picture, I mean, the charge that you are trying to mask a decline in sales, I mean, when you are saying that revenues are up, I mean it comes at a time when everybody is, you know, falling on hard times, especially for information technology spending. I mean there is nothing wrong in this climate with having a declining sales rate right now.

Kumar: Well,you are right, there is nothing wrong with it, and we, like everybody else, are seeing tough economic times. You can refer to our April 16th press release where we talked about the fourth fiscal quarter. We clearly said economic times are tough, but we are doing better. [...] Part of the difference here is our new business model. [...] If you look at our press release, in the body of the press release is a very clear sentence that says we also signed $1.3 billion of backlog in the quarter that under the new business model will come into revenue in the future. That is $1.3 billion more than reported revenue that we signed. These are committed customer contracts, signed, done, signed, sealed and delivered, that doesn't come into the [current] period, and to leave that out, I think, is just unfair.

Griffeth: But there is a question posed in the article of how much of what you have booked was maintenance business as opposed to actual new software business.

Kumar: That's right, and we said very clearly today that our maintenance numbers conformed to GAAP accounting, our maintenance numbers conform to accounting statements of position of 972 and 989 of a technical pronouncement...

Griffeth: With all due respect, Sanjay, you can hide behind GAAP accounting methods. Is there a possibility that it is easy to perhaps confuse maintenance business from new software contracts?

Kumar: No, you can't hide [behind] GAAP. GAAP accounting rules are the ones that we all live by and they are very strict. We had both KPMG and [Ernst & Young] yesterday restate that they are ok with our numbers. We have taken the unusual step of getting an attestation to our pro forma numbers. I don't think there's really any confusion at all with respect to the numbers. And we also, by the way, further details on our call this morning and there's information on our Web site as to why our maintenance numbers are n the range, but at the low end of the range, of software companies. And it's a perfectly plausible answer. We don't need to have maintenance number like anybody else, but we are not doing anything wrong fundamentally in our business.

[....]

Griffeth: I'm running out of time, unfortunately, but for the record, have you been contacted by anybody connected at all with the SEC about any possible investigation, with it has, in fact, begun or whether they are in formal inquires about your accounting practices?

Kumar: No, sir. [...] I, my general counsel and CFO have no knowledge whatsoever of any SEC investigation

Griffeth: Any thoughts of taking action on this on your part?

Kumar: Well, I think we have to do what's right for the company. Today we want to clarify our business model, defend what's right for the company and defend our shareholders. I am most concerned about shareholder value and I think ultimately the truth will prevail. [...]

Griffeth: Mr. Kumar, thank you for taking the time the chat with us

Kumar: Thank you

2. A mid-sized company has a standard sales contract, but sales personnel frequently modify the terms of the contract. The nature of the modifications can affect the timing and amount of revenue recognized. Individual sales transactions are frequently material to the entity, and the gross margin can vary significantly for each transaction.

The company does not have a procedure in place for the accounting function to regularly review modifications to sales contract terms. Although management reviews gross margins on a monthly basis, the significant differences in gross margins on individual transactions make it difficult for management to identify potential misstatements. Improper revenue recognition has occurred, and the amount have been material. Does this scenario meet the definition of a material weakness? Why or why not?