Claim on auditor switch

Prosecutors suggest CA wanted to keep payout details quiet

BY MARK HARRINGTON
Newsday Staff Writer

April 13, 2006

When Computer Associates announced it was changing outside auditors in the summer of 1999, the company calmed the red flags that normally flutter over such disclosures by saying it switched because the new firm "gave us a nice proposal and we decided to go with them."

But a recent government filing in the upcoming trial of two former CA executives suggests a considerably different reason - one that points a new spotlight on the company's past portrayal in filings that there were "no disagreements" of note when it terminated the former auditor, Ernst & Young.

In the filing, prosecutors in the securities fraud case against former executives Sanjay Kumar and Stephen Richards allege that CA dropped the former auditor because the firm demanded that CA "make prominent disclosure" of the costs associated with a controversial $1.1-billion stock payout plan in 1998. The payout, awarded to then-chief executive Charles Wang, then-president Kumar and executive vice president Russell Artzt, fueled a firestorm of investor outrage, leading to suits that eventually forced the return of 4.5 million shares.

The government's latest claim is in a footnote to the filings in which prosecutors seek to debunk claims that executives relied on auditors to catch misdeeds, and to admit information about the lucrative stock plan as a possible motive for the Kumar's alleged role in the $2.2-billion accounting scandal. Kumar and Richards have pleaded not guilty. Wang and Artzt have not been accused of any wrongdoing.

"The KESOP [key-employee stock ownership] plan is necessary to complete this story because, after CA's then-accountants directed CA to make prominent disclosure of the KESOP plan's costs, CA (of which Kumar was president at the time) promptly fired the accounting firm and replaced it with another one," the government contends. "Thus, the KESOP bonuses and their aftermath are key to rebutting any claim by Kumar of good-faith reliance on accountants or auditors."

CA declined to comment, as did assistant U.S. Attorney Eric Komitee. An Ernst & Young spokesman also declined to comment. A spokesman for Kumar noted, "It was the audit committee that decided to change auditors," adding that Kumar "was not a member of the audit committee."

Herb Greenberg, a senior columnist at MarketWatch who raised the first red flags about the auditor change in a July 6, 1999, column, expressed surprise recently about the new government disclosure given CA's assurances to him at the time. A CA spokesman had downplayed the change, saying it was "like any other vendor change. We were impressed with KPMG. They gave us a nice proposal, and we decided to go with them." Greenberg had been particularly suspicious of the disclosure because it was filed late on July 2, before the July 4 holiday weekend.

"It just goes to show you that a disclosure before a three-day holiday should always be read very carefully, and that what companies say should always be taken with a grain of salt," Greenberg said.

Gary Lutin, an investment banker who conducts a forum for CA shareholders, said the government's contention, "if true, would certainly raise even more serious questions about what CA directors have been doing to protect the interests of shareholders." Most directors have since left the board.

In a separate court filing by Richards' attorneys, rarely released minutes of a July 2, 2003, CA board meeting show an outside attorney making a case for directors to begin an internal probe of accounting misdeeds.

CA had conducted a limited probe of certain quarters in the prior year, but it had turned up no wrongdoing. The outside CA attorney noted that in May 2003, prosecutors had already identified three employees as subjects of their probes, and requested that CA waive any right of attorney-client and work-product privilege.

Lutin, who has tangled with CA over access to board minutes, suggested that directors lagged in seriously investigating accounting problems.

"Reporters, prosecutors, federal investigators and class action lawyers - everybody was investigating the accounting problems except the board [at that time]," Lutin said. "The people whose job it was to investigate this were the only ones who weren't."

CA declined to comment on the minutes.