21 February 2002 Systems management software giant Computer Associates has become the latest high-tech company to face scrutiny over its accounting practices.

Reports suggest that the Securities and Exchange Commission and federal prosecutors have launched a preliminary investigation into the Islandia, New York-headquartered company’s controversial accounting practices. The probe will focus on whether executives at the software house deliberately overstated profits in an attempt to boost the company’s share price.

News of the inquiry sent shares in CA tumbling by more than a fifth, to a 52 week low of $20.91 (EU24.01), despite denials from the company’s executives. “We have not been contacted by the authorities regarding any investigation…The reporting of our financial results has always been in accordance with all applicable accounting principles,” CA said.

CA adopted its new accounting method in October 2000. At the time, CEO Sanjay Kumar claimed that the policy of booking software revenues across the full term of contracts, instead of recognising deal revenue upfront, was a more accurate way of accounting for software sales.

The change in CA’s revenue recognition policy pushed revenues into the future and prompted steep declines in headline figures for both sales and profits. Since then, investors and analysts have been highly critical of its financial statements, labelling them confusing and meaningless. Sam Wyly, the entrepreneur and CA shareholder who launched a proxy battle for control of the company, has been one of the most vocal critics of CA’s ‘pro-forma’ accounting practice.