Updated from 9:40 a.m. EDT Computer Associates ( CA) on Monday restated two years of financial results, named former Vivendi ( V) executive Kenneth Cron interim CEO, and unveiled a list of reforms designed to convince government investigators and investors that the software giant has finally cleaned up its act. CA shares were recently up 61 cents, or 2.1%, to $29.03. Cron takes the place of former CEO Sanjay Kumar, who was demoted last week after months of ugly revelations concerning fraudulent accounting practices by other CA executives. Kumar, appointed to the new position of chief software architect, has not been accused of wrongdoing, but on his watch the company mislead investors by backdating software license sales to inflate earlier quarters. Earlier this month, former CFO Ira H. Zar, and former executives David Kaplan and David Rivard pleaded guilty to securities fraud in connection with the scandal. The restatements shift more than $2 billion in revenue from year to year, but make no significant changes to the company's cash position or other key balance sheet metrics to the fiscal years affected, 2000 and 2001. Computer Associates' audit committee found that a total of $2.2 billion of revenue was booked prematurely within fiscal 2000 and 2001, about $1.782 billion in fiscal 2000 and $445 million in fiscal 2001. The restatement resulted in a revenue decrease of $2 million to $6.092 billion in 2000 and an increase of $558 million to $4.748 billion in 2001. There was no earnings impact in 2000, while the 2001 loss for the year dropped by $333 million to a restated loss of $258 million, or 44 cents a share, from a previously reported loss of $591 million, or $1.02 a share. CFO Jeff Clarke, who has been named chief operating officer, said in a conference call that the fraud did not entail "the creation of fictitious revenue." Clarke will remain CFO for now, but the company is looking for a replacement.
Cron, who has been a member of CA's board since 2002, said that he was not a candidate to become permanent CEO. Asked on a conference call how long the company will take to find a new chief executive, Chairman Lewis S. Ranieri, said: "We have no sense of crisis. We want to search well, not quickly." Ranieri also said that the company will not revert to the previous practice of combining the roles of chairman and CEO. Clarke referred to the practice of backdating revenue as "totally unacceptable," and said CA will appoint a chief compliance officer and a chief accounting officer to be sure that the company prepares its books in an ethical manner. The company will also replace its proprietary accounting software with an industry standard package at a cost of $5 million to $10 million, he said. CA is clearly struggling to avoid a criminal prosecution of the company itself, a move that would likely have crippling consequences, including the loss of lucrative government contracts. Ranieri said that CA continues to work with government investigators, and said that the company's internal probe has consumed thousands of work hours and cost more than $30 million. The company looked at more than 1,000 license agreements, and analyzed more than 1.5 million documents and emails. He said that any employee who does not cooperate will be fired, as nine members of the company's financial and legal teams were last week. "That sends an important message," he said. Asked to define Kumar's new role, Ranieri was vague, saying that the former CEO will help take "products to the next level." It's worth noting that Kumar implemented a new business model in the fall of 2000 under which software license revenue is recognized over the life of each agreement. Previously, revenue was generally recorded upfront. The change removes the incentive to recognize revenue prematurely.