Computer Associates ( CA) plunged 16% Wednesday following reports that federal prosecutors have launched a preliminary investigation into whether the company deliberately overstated earnings. The stock was slammed after Long Island's Newsday reported that the U.S. attorney for the Eastern District of New York and the Federal Bureau of Investigation are probing the company to see whether it violated federal criminal fraud laws through its accounting practices. In addition, The New York Times, citing people close to the investigation, suggested that the company artificially inflated profits to boost its stock price and enrich senior executives, leading to the scrutiny of federal prosecutors in Brooklyn. Executive Assistant U.S. Attorney William Muller said he had seen the reports, but he declined to comment on them. An FBI spokesman in New York also refused to comment. In a statement early Wednesday, Computer Associates said it hasn't been contacted by the authorities regarding any investigation and doesn't know what, if anything, is being investigated. A spokesman said the firm's attorneys "might reach out" to the authorities. A lawyer representing the company couldn't be reached. "We are confident in the propriety of our accounting," the spokesman said. Shares of the world's fourth-largest software maker were dropping $4.21 to $21.08 around midday on the
New York Stock Exchange , where CA was the second most active stock. Earlier in the session, the shares were down 20%. Newsday reported that investigators are looking into whether the company has properly distinguished between revenue it receives from the sale of software and the fees it charges to service, upgrade and maintain those software products. Perhaps it was only a matter of time before CA got caught up in the ever-spreading accounting worries because the company's financial results have been a hot topic on Wall Street for more than a year. Following the accounting debacle that led to the collapse of energy trader Enron, a host of companies, including Global Crossing, Nvidia ( NVDA) and Tyco ( TYC), have been dragged down by rumors and speculation about questionable bookkeeping. Computer Associates has come under intense scrutiny ever since it adopted a style of presenting its results that the company describes as "pro forma pro rata." The calculations are more aggressive even than ordinary pro forma numbers, which are widely used by corporations to exclude certain items and costs from the actual results. In November 2000, Computer Associates announced that it would recognize revenue from customers over the life of a software contract, rather than recording most of it upfront. The new model was also expected to give customers more flexibility to change their orders. However, because of that accounting change, CA began publishing pro forma pro rata numbers, which means the firm has recrunched historical numbers to show them as if the company had been recognizing revenue in its new way all along. Analysts have pointed out that under the new accounting method, earnings and revenue are overstated, as this reporting style was designed to mitigate the impact of the change from a licensing model to a subscription-based model. In the fiscal third quarter, Computer Associates reported pro forma pro rata revenue of $1.4 billion, more than twice the actual revenue as measured by generally accepted accounting principles. Operating earnings were reported as $417 million, or 71 cents a share, but the company actually lost $231 million in the quarter, or 40 cents a share, under GAAP. The company discloses both sets of numbers. Last year, the company's use of pro forma pro rata numbers was at the center of an attempt by Texas investor Sam Wyly to oust the existing CA board. Wyly came up short, but not before he convinced several shareholders to vote with him. After the incumbents survived a stockholder vote, CA's executives expressed confidence that their business model had been vindicated.