The U.S. attorney and the FBI have launched a preliminary investigation of whether Computer Associates International Inc. violated federal criminal fraud laws through its accounting practices, according to several sources familiar with the investigation.
The sources stressed that the investigation of the Islandia, N.Y.-based software giant is in its initial stages and there is no firm evidence that anything illegal has occurred.
Computer Associates, which acquired Oakbrook Terrace-based Platinum Technology Inc. for $3.5 billion in 1999, last year wrestled with a proxy battle over control of the company and questions about its accounting practices.
A former CA employee who was contacted by the U.S. attorney’s office several weeks ago said the questions centered on the way CA has reported revenue in its financial statements.
Company spokesman Robert Gordon said, “We have not been contacted by the U.S. attorney’s office regarding any investigation.”
An FBI spokesman in New York, Joseph Valiquette, declined to comment, as did Executive Assistant U.S. Attorney William Muller.
The former CA employee said a representative from the U.S. attorney’s office indicated he was still developing a list of candidates to be interviewed. The Brooklyn-based assistant U.S. attorney assigned to the case declined to comment.
Investigators are looking into whether the company has properly distinguished between revenues it receives from the sale of software and the fees it charges to service, upgrade and maintain those software products, according to the sources.
Securities and Exchange Commission rules require companies to make clear distinctions between the revenues of each, and to equally divide recognition of maintenance revenue over the life of the service contract, said John Coffee, an SEC law expert at Columbia University, who added he was not familiar with any CA probe.
While CA in the past has acknowledged fielding SEC inquiries, the company has not been accused of wrongdoing by the agency and has long denied suggestions of accounting irregularities.
It was uncertain Tuesday what role, if any, the SEC was playing in the probe. An SEC spokesman didn’t return calls.
Coffee said FBI involvement in the CA probe would indicate any potential case would be a criminal, not civil, matter.
“The key word is intent,” said Douglas Carmichael, professor of accounting at Baruch College in Manhattan. “If management intentionally misstated financial results, that’s fraud.”
While fraud can be the basis of both civil and criminal cases, Carmichael said, pursuit of the latter “would basically mean some belief there may have been an intentional financial misstatement” that can be proved “beyond a reasonable doubt.”
Coffee stressed, however, that the contacts appear to be preliminary, and may not result in any action.
He said the SEC requires software companies to clearly delineate product and service revenues to give investors an unobscured picture of how they make their money.
