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CASE STUDY IN CSCI21

Professional Ethics, Quality

Consciousness and Social Issues in
Computing

CSCI21 Professional Ethics, Quality Consciousness and Social Issues in

Computing

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CASE PROBLEM NUMBER 1

Computer Associates: A Film with a Scandal-Riddled Past
Computer Associates (CA) is a multinational computer software company
founded in 1980 and
Headquartered in Islandia, New York .In 1989, it became the first software
organization to generate $1 billion in sales. 27 Today CA employs nearly
14,000 people in 150 offices spread across more than 45 countries. Its 2008
annual revenue was 4.3 billion.
In 1997, the chairman of Computer Sciences Corporation (CSC), Van
Honeycutt ,filed a $50 million bribery and exertion suit against CAs founder
chairman, and CEO Charles Wang. Honeycutt claimed that Wang had offered
him a $120.5 million bribe to sell the company to CA for 100 per share. 28 Van
Honeycutt further alleged that when he did not accept the offer, CA
executives threatened to wrongfully harm CSC if it refused to agree to a
transaction at $98 per share. It was a few weeks after this alleged incident
that CA launched a hostile takeover bid. Eventually the two companies
dropped all lawsuits related to CAs takeover attempt and announced a major
expansion of their global software licensing agreements. 29
In 1999, a CA shareholder objecting to Wangs compensation package took
Wang and two other executives to court and kept them from receiving a $1.1
billion payout. As a result, Wang had to settle for a total compensation of
$675 million for 1999making him the highest paid executive in the United
Sates. This amounted to one of the largest executive compensation packages
in history at that time, and came at a time when CAs earnings and stock
price had fallen.30
The vice president of finance of CA pleaded guilty to conspiracy to commit
securities fraud and obstruction of justice in April 2004. The fraud involved
backdating contracts worth hundreds of millions of dollars to pump up the
companys quarterly earnings both to meet analysis expectations and to
make the firms stock look more attractive to investors. 31 The former CFO and
a former senior vice president were also suspected of playing a role in the
fraud.
In April 2004, Sanjay KumarChairman and CEO since Wangs retirement
in 2002resigned, under pressure from the board, which feared he would
become embroiled in the growing accounting scandal. 32 Also the month, the
company restated its financial results from 2000 and 2001 to reflect $2.2
billion in revenue that was booked prematurely. Kumar was charged with
securities fraud, conspiracy, and obstruction of justice in September 2004.
Kumar was eventually found guilty and sentenced to 12 years in jail.
CA agreed to pay $225 million to shareholders in restitution in order to
defer criminal prosecution. CA said it would cut its workforce by 800 to help
pay the restitution. Also as part of the agreement, an outside monitor was
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assigned to track CAs financial reporting for one and a half years. CA also
agreed to assist the government in retrieving any compensation and bonuses
awarded based on the fraudulent financial results. 33

In more bad news for CAs Kumar, the incident against him was revised in
July 2005 to include charges that he offered a $3.7 million bribe to discourage
a business client from revealing CAs fraudulent accounting practices. 34
As a result of these various scandals, many CA board members and
executives were replaced between 2004 and 2006, including the CEO,
chairman of the
board, executive vice president of development,
CFO,COO,CTO, chief marketing officer, chief administrative officer, and cogeneral counsel. Most of these executives were sentenced to jail, fined
millions of dollars, or both.

Question
1. CA executives involved in the accounting scandal were not accused of
reporting bogus contracts or hiding major problems in the business.
The contracts that were backdated were real sales agreements. Was
this really crime? Should the individuals have been punished to
harshly?
2. In December 2004, CA appointed Patrick J. Gnazzo as a senior chief
compliance officer to demonstrate to the government and shareholder
that the firm would take measures to operate ethically. Gnazzo served
in this role at United Technologies for 10 years and had been a
member of the board of directed of the Ethics Officers
Association.Gnazzo reported to a new executive vice president and
general counsel at CA as well as the boards Compliance Committee.
Outline some of the action Gnazzo might have taken in his six months
on the job.
3. John Swainson, a 26- year veteran of IBM, joined CA in November
2004 as CEO and president. His first few months with the firm were
rough-major customers threatened to dump the firm; some products
were behind schedule and were of poor quality; executives had to be
fired for breaking company rules; accountants continued to find past
mistakes; and many newly hired executives had to be brought on
board. What sort of leadership could he have demonstrated to show
that he was determined to avoid future scandals at CA?

CSCI21 Professional Ethics, Quality Consciousness and Social Issues in

Computing

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ANSWER:

CSCI21 Professional Ethics, Quality Consciousness and Social Issues in

Computing