A Letter From Prison Memo

Stephan Richards, former global head of sales at Computer Associates, is currently serving time in federal prison. Richards was accused and convicted of facilitating the extension of the fiscal quarter, allowing subordinates to obtain contracts after the quarter ended, and failing to alert the finance and accounting departments about contracts that may have been backdated. Doctoral student, Eugene Soltes, has contracted Richards and asked him questions regarding the incident and how managerial responsibilities affected his decisions.

The Seriousness of Stephen Richards Actions
Stephen Richards manipulated Computer Associate’s quarter end cutoff to better align results with market expectations. Richards failed to take the Generally Accepted Accounting Principles (GAAP) into consideration without realizing the implications of his actions. Richard’s actions boosted Computer Associates reported earnings, by employing overly aggressive accounting practices. Exhibit three states, “within the accrual accounting system, manager have significant discretion with their firms’ accounting choices. Management has the ability to make choices that can opportunistically lead to higher or lower reported earnings” (A Letter from Prison page 14).

Richard’s addresses this managerial flexibility in a question asked by Eugene explaining that the lines between legal and illegal became very blurry. The seriousness of Richard’s actions landed him seven years in the Taft Federal Correctional Institution in California. Though we are only speaking of the revenue being recognized two or three days early or two to three days late, the actions were illegal and misleading to shareholders. Richard’s knew of the wrongdoings, by him self and other upper level management, and chose not to report it, even though he was in the position to do so.

GAAP Flexibility
If Computer Associates achieved the same financial results through GAAP flexibility, Richard’s would still be guilty. Richard’s violated the rules of reporting financial results, and took extreme measures to achieve the financial results that Computer Associates reported. The SEC has the purpose of protecting investors from dangerous or illegal financial practices. They require accurate financial disclosure by companies, which Computer Associates failed to do. GAAP does allow for discretion of managers, and that is when ethics come into play. Computer Associates management was involved in false reporting, and encouraged a “whatever it takes” attitude.

Recommendation for Stephen Richards
It is clear that Richards was placed under very high-level stress and encouraged to meet deadlines that may have been impossible. However, if I were placed in his position, I would not have extended the fiscal quarters or encouraged the backdating of contracts. Computer Associates was growing extremely fast, and I do not think enough emphasis was put on ethical responsibilities and the management was trying to “get rich quick” while the company was growing so rapidly. The top level management did not put enough emphasis on having a strong legal team in place to assist them in achieving their goals without sacrificing sound accounting principals.

I would recommend that managers at Computer Associates would have had an accountability system that held managers liable for their discretionary decisions. The company was very results oriented, which is not always a bad thing, but the sales team should have had stronger performance measurements that were not based on financial growth alone. If Computer Associates would have taken these measures, they may have not experiences such rapid growth and financial success. However, they would still have a company to run and would not be spending a portion of their lives in federal prison.