Copyright 2011 Deloitte Development LLC. All rights reserved. 2 Footer Copyright 2012 Deloitte Development LLC. All rights reserved. Revenue Recognition: Computer Associates Holding Quarter Open Computer Associates Designs, develops, markets, licenses, and supports software products worldwide SEC complaint alleged among other things: CA Prematurely recognized over $3.3 billion in revenue from January 1998 through September 2000 o Involved at least 363 software contracts that the company or its customers had yet to execute Delayed the quarter closing and included revenue from subsequent periods o Known internally as 35-day months Revenue was overstated by 25%, 53%, 46% and 22% for the 1st, 2nd, 3rd and 4th quarters of 2000, respectively
Copyright 2011 Deloitte Development LLC. All rights reserved. 3 Footer Copyright 2012 Deloitte Development LLC. All rights reserved. Revenue Recognition: Computer Associates Holding Quarter Open RESULTS Agreed to a settlement of $225 million for restitution to shareholders Corporate governance and financial accounting controls reform Indictments Sanjay Kumar former CEO and Chairman of the Board Stephen Richards former Head of Worldwide Sales Stephen Woghin former General Counsel Pled guilty to securities fraud conspiracy and obstruction of justice charges SOURCES: SEC Litigation Release 18891 and U.S. Department of Justice Press Release, 9/22/2004 Copyright 2011 Deloitte Development LLC. All rights reserved. 4 Footer Copyright 2012 Deloitte Development LLC. All rights reserved. Revenue Recognition: Homestore.com, Inc. Round-Trip Sales SOURCE: http://www.sec.gov/news/press/2002-141.htm Excerpt from the SEC Complaint:
Bogus Barter Transactions. Throughout 2000 and 2001, Homestore's sale of online advertisements was one of its primary revenue sources. Homestore engaged in a series of complex round-trip barter transactions to inflate revenues and meet Wall Street estimates. The essence of these transactions was a circular flow of money by which Homestore recognized its own cash as revenue. Specifically, Homestore paid inflated sums to various vendors for services or products; in turn, the vendors used these funds to buy advertising from two media companies. The media companies then bought advertising from Homestore either on their own behalf or as agents for other advertisers. Homestore recorded the funds it received from the media companies as revenue in its financial statements, in violation of applicable accounting principles. Copyright 2011 Deloitte Development LLC. All rights reserved. 5 Footer Copyright 2012 Deloitte Development LLC. All rights reserved. Revenue Recognition: Homestore.com, Inc. Round-Trip Sales SOURCE: http://www.sec.gov/news/press/2002-141.htm As a result of a significant revenue shortfall in the first quarter of 2001, the company devised a plan to use a major media company as an intermediary in some round-trip transactions. The overall scheme required Homestore to "refer" vendors to the media company, and the vendors to purchase online advertisements from that company. In return, the major media company purchased online advertising from Homestore for which the media company acted as a media buyer.
Copyright 2011 Deloitte Development LLC. All rights reserved. 6 Footer Copyright 2012 Deloitte Development LLC. All rights reserved. Revenue Recognition: Homestore.com, Inc. Round-Trip Sales SOURCE: http://www.sec.gov/news/press/2002-141.htm Using this structure, Homestore paid a total of $49.8 million to various vendors in the first two quarters of 2001. These vendors then paid $45.1 million to a major media company to purchase online advertisements. Homestore, in turn, recorded $36.7 million in revenue from the major media company's related purchase of Homestore online advertisements. In short, Homestore recycled its own money to generate revenues. Homestore used this same general plan with another media company in the second and third quarters of 2001 to fraudulently recognize an additional $9.7 million in revenue.
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