Letters from Prison

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Letters from Prison

Sadly when reading this article the most amazing lesson that jumps to mind is how easy it is for a bright business manager and a growing company to run into trouble for failing to follow basic business measurement principles. Constant vigilance and observance of the financial documents is imperative to ensure a healthy growth for any company and professional career. Computer Associates International, Inc. (CA) was a four-person start-up founded in 1976. CA produced software for IBM computers to assist businesses with database, application, and financial management software related computing needs. Stephan Richards joined the company in 1988 as a recent college graduate and had a meteoric run directly up the corporate ladder in just 12 years, going from local sales office manager in Brisbane to global head of sales in 2000. CA also had a similar meteoric growth period and by the late 1990s boasted almost 18,000 employees and subsidiaries in approximately 100 countries. As most large companies they were using the accrual accounting method (idea that income should be measured at the time major efforts or accomplishments occur rather than simply when cash is received or paid) and as such they are using expense and revenue recognition methods which fall under the realization concept (also known as recognition concept which aids accountants in determining when a revenue or expense has occurred so that it can be measured, recorded, and reported accurately in the financial reports). CA licensed their products for periods of 3-10 years during which they provided software updates and technical support. The period in which they recognized revenue was once a contract was signed and believed they were meeting the Generally Accepted Accounting Principles (GAAP) of recognizing revenues once the contract was signed, software was delivered, and payment was reasonably assured. There are multiple lessons to be learned from this case but to focus on some more of those lessons directly related to measurement it was easy to learn how influential goals become when managers are under pressure to narrowly focus on meeting the goals at whatever-the-cost which results in a negative tradeoff for departing from internal controls (concept that provides senior management with reasonable assurance that an enterprise is on track to achieve its mission successfully, minimizing probability of unexpected surprises, ensuring reliable financial reporting and compliance with laws/regulations, etc.). Failure to properly establish internal controls that accurately measured performance management within realistic goal expectations leaving little room for manipulation of the financial documents and how important these controls could have been in avoiding this situation is another lesson learned. The importance of ethics in accurately meeting the matching and conservatism accounting concepts is another fundamental lesson this article highlights especially in the case specific issue of revenue recognition. Some of the key take aways from the analysis of this case is the ease in which company growth/development can outpace development of proper accounting and internal control methods. To me it seems obvious after this analysis and the past analysis that companies in growth periods that are interested in the long term sustainability of said company should review their accounting methods and internal control methods often, involving as many senior managers, external auditors, board members, government compliance agencies and third party consultants or neutral observers as possible or practical. While the obvious need for control and privacy will probably leave some readers against this hypothesis it seems appropriate to state that the only way to avoid conflicts of interest in establishing accounting and control methods is to involve educated advisors that have nothing to benefit or lose from their involvement with the company. Transparency and...
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