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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis. All posts prior to September, 2007 are in the public domain, but after September 4, only subscribers to The Analyst's Accounting Observer will see all posts going forward. Only selected, occasional posts will be released to the public domain from September 4 forward.

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Deja Vu: Computer Associates Restates Earnings
Location: BlogsAAO Weblog (Public)    
Posted by: Jack Ciesielski 5/27/2005 6:37 AM
It's the Freddy Krueger of restatement stories: "Nightmare On Software Street." The thing refuses to die.

Yesterday, Computer Associates filed a non-reliance 8-K on its 2001 and 2000 financial statements. They'd already been restated in April 2004 because of revenue recognition flaws. And now there are more, it seems: CA has found additional improper transactions in the years 1998 through 2001.

Some of them were "contemporaneous purchases and sales (or investments and licenses) of software products and services with the same or related third parties... [apparently] not ...negotiated on an arm's-length basis and [having] no valid commercial purpose." In short, they made themselves look bigger than they were by arranging sales for the sake of sales that contained no profit. It sounds like the website advertising game played in the mid-1990's where firms would sell each other advertising with no profits in them, just for the sake of making revenues look better.

Thought: if your local supermarket injected its turkeys with water to make them look plumper, wouldn't you be incensed? Would you want to pay for the water weight? How different from that scam are these kinds of deals?

While the transactions originated in 1998 through 2001, the accounting treatment has flow-through effects in the following years - all the way up to 2005. The company says the "impact on revenue and net income (loss) in subsequent periods is relatively small" and will restate its financial statements for fiscal years 2002 through 2004, as well as make adjustments in 2005 figures. Coming to EDGAR this summer.
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