Apparently, in 2000, a former client based in Asia had signed a $27 million licensing agreement with CA to coincide with CA's agreement to license the client's software for $27 million. Prosecutors charge that Kumar approved the "swap" even though both firms never used or sold the licensed software from each other. The latest charges claim Kumar allegedly paid a $3.7 million bribe to the businessman to cover up his knowledge of falsifying business transactions in order to inflate sales.

Five former CA executives, including Steven Woghin, the former general counsel have already pleaded guilty to conspiracy to commit securities fraud and obstruction of justice. Woghin is allegedly one of 2 executives who negotiated the payment to the unnamed businessman at Kumar's direction.

In 2004, CA has agreed to pay $225 million to settle the original investigation by the Department of Justice and the SEC.

Fraud is often difficult to prove when a conspiracy is involved, especially at the senior management levels. However, based on my experience, one of the first things to look for by the accounting department is to obtain a copy of the sales contract and verify that terms of the agreement were actually met before before recording revenue.

The bogus transactions could have been analyzed from 2 different perspectives, sales and expenses.

With something as nebulous as software licensing, there are generally key components one should look for when analyzing sales. The first is "delivery" of CA's software code to the licensee. The second is verification from CA's technical support team to the licensee. Normally, a sale in the magnitude of $27 million would include training and technical support to the licensee. The third is for shipment of the product by the licensee if it was intended for resale. In this instance, the licensee is often known as a value added reseller ("VAR").

The fourth and obvious is did CA receive a check for $27 million from the client?

If it were a bogus "swap" transaction, couldn't one argue that a check didn't need to be cut since CA and the other firm entered into a transaction of equal value ? No. As part of internal accounting control procedures, the transactions are separate and distinct.

The fifth and most revealing confirmation would be identifying who would have received credit for the sale and was a commission paid out. If a legitimate sale were taking place, you better believe someone was going to claim credit for the transaction and the firm more than willing to pay out such commission. Generally, a sales person receives a "commission" for the sale. Even where there is no formula driven commission, a year end bonus is often dictated by how much revenue a salesperson generates. Based on the information available, or in this case, not available, the accounting department should have been suspicious.

When analyzing expenses, the accounting department would also look for a copy of the contract CA supposedly signed when entering the "consulting agreement". The contract would have outlined the services to be rendered, specific departments that would be involved with the consultants, and the expected payment schedules for those services rendered. Usually a department supervisor verifies that work has been completed by the consultants or at the very least, reviews time sheets along with summaries of what was performed by each consultant. Having a senior executive sign off on the expenditure isn't enough. No check should have been cut without the proper documentation.

I can not understand how 2 large expense transactions ($27 million and $3.7 million) could have gotten through even with Kumar personally signing the authorization.

If CA did not cut a check for the consulting services, then the expenses should not have been recorded under cash basis. Under accrual basis accounting, the expense could have been recorded but a follow up within 1 year should have identified that the consulting services were never rendered and therefore should not have been paid.

A firm should always have a clearly defined reporting structure where these problems can be investigated further. If internal accounting personnel were uncomfortable about reporting the issues directly to senior management, CA's external auditors could have been notified anonymously.

Of course, the firm's auditor's should have used similar audit procedures to confirm the legitimacy of the recording of sales and expenses.

© 2005 Nelson Chin.
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