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ACT172 Letter-from-Prison

Technical writing (Mapua Institute of Technology)

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Case Study #1
Letter from Prison

Guide Questions:
1. How serious were Richards’ actions?

Stephen Richards exhibited great misconduct concerning the performance of his

responsibilities as the global head of sales at Computer Associates. At first glance, his
actions may seem harmless to the entirety of the company but obviously, the
consequences that followed will forever taint the reputation of Computer Associates.

Among his responsibilities is to rectify the manipulation of the generally accepted

accounting principles (GAAP). The said manipulation is done by recording revenues
earlier in date, when in fact these revenues have not yet been earned. They practiced the
35-day month procedure where revenues for the next quarters are being slipped into
supposedly closed quarters so as to increase the revenue for that particular year. Given
that he has knowledge about such transgressions, Richards opt to not do anything about it
clearly showing that there is intent in his actions. Because the company consistently earns
huge amount of sales, it caught the attention of the DOJ and the SEC. This eventually
prompted the investigation that led to the discovery of fraud present in the Computer
Associates.

Fraud is defined as the unethical deception which is intended in order to have

financial gain. As the investigators found sufficient evidence to prove the backdating of
contracts, Richards was found guilty and was sentenced to seven years in the Taft Federal
Correctional Institution in California.

2. If Computer Associates achieved the same financial results through GAAP

flexibility (or real actions), does your answer change? How?

Even if Computer Associates achieved the same financial results through GAAP
flexibility, the group’s answer would not change. Shareholders use the financial
statements as its key performance indicator. This is why many companies have been
using strategies to increase its revenues in order to stay competitive. The sales-driven-

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culture of the company creates a toxic work environment because it promotes financial
and ethical violations for the sake of producing high revenues.

There should be an appropriate revenue recognition to ensure that the

shareholders are looking accurately and clearly as to how their investments are
performing. If the revenues are massively overestimated, small errors will slowly arise
that will affect the full collapse of the company. For as long as they are not transparent to
the accounting and finance department, relevant decision making about the future of the
company will be compromised due to the wrongful disclosure of the revenue. This act of
Computer Associates will still be considered illegal as it tries to mislead shareholders and
potential investors.

3. Does it matter what your competitors are doing?

Yes, because knowing and understanding who your competitors are, what they are
doing, and what they are offering will immensely help you position your company and
your product/service in the industry. This can be achieved by conducting a competitive
analysis wherein you get to know your direct and indirect competitors along their
corresponding strengths and weaknesses. It will also help in formulating the marketing
strategies of your company to improve your performance that, in turn, will boost your
sales.

In the case of Computer Associates where the aggressive accounting practice is

being done by other companies as well to show overestimated revenues. This is being
done through understating account such as depreciation expense, prematurely recognizing
of revenues and many more. This is being widely propagated by many firms.

The company must not do the illegal and unethical act of aggressive accounting
just because its competitors are doing so because it has a negative effect to the company
and also to the shareholders that have investment in it. After all, the enjoyment of
massive profit gained from fraudulent acts has a bill that comes due and if it happens, the
reputation of the company will have a crack that will put it in danger until to its total
collapse.

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4. Step back and consider management’s incentives and choices. What is the
motivation to manage earnings?

Earnings management is classified as within the scope of GAAP while fraud is

outside of its boundaries. It is said that firms that have managed their earnings before are
more likely to perform fraudulent acts. Based on a research made by Schipper (1989),
earnings management is an action made by managers to manipulate financial reports in
order to show extra gain or profit. The motive behind the implementation of earnings
management must be known in order to avoid such behavior because studies proved that
all earnings management practices have motives that lead to their actions.

Considering the management’s incentives and choices, the motivation behind the
earnings management is the speculative motivation. This type of motivation is present in
a situation when a manager or head of a department wants to attain his own personal
incentives or benefits. The financial goals that shall be targeted is what push the manager
to increase the record of sales.

Other types of motivation worth mentioning are altruistic motivation and

pressure from affiliated parties. Altruistic motivation happens when a manager or head of
a department wants to make a good image about the company. This motivation is mostly
driven by the desire to increase the confidence of the shareholders and to alter income for
taxation purposes.

Pressure from affiliated parties, on the other hand, is present when the
management wants to meet the expectations for such industry. Another is when the
company wants to meet or exceed the earnings forecasted by external analysts’ for the
said industry.

5. Richards describes how difficult it is operate the “gray.” Richards wanted more
“framework”: Do you agree or disagree? Do personal boundaries suffice?

The group strongly agrees with Richards’ statement. Operating in the “gray” truly
is a burdensome on the part of the employees. Confusion and uncertainty arise forcing
them to base their decisions on what they make out of the situation. It’s as if the top

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management simply informed them of what the target is and they are left to do whatever
it takes to make this target happen without realizing that it is no longer ethical or legal.

This “gray” area prohibits the consistency of the procedures causing so much
dilemma to the person that has to make the decision. The framework allows employees to
understand the company’s policies, goals, standards, and procedures. This may include
how managers will govern the company and an order to always act with fairness and
integrity. This will guide the employees, especially the managers, when making
decisions.

Personal boundaries are set of personal rules of an individual for other people
indicating their acceptable and unacceptable behavior towards the person who made the
said rules. These are also guidelines made by the person to determine the ways or
procedures the person thinks are reasonable, safe and permissible for certain problems.
This will not suffice because even though personal boundaries have rationale behind, it is
still a personal perspective of a certain person which may be different from the views of
other people that might cause disrupt in the management.

6. Suppose you were placed in Stephen Richards’ position at Computer Associates and
were under pressure to extend the fiscal quarter. How would you handle the
situation differently? What would be the expected consequences?

If the group were to face the same dilemma as Stephen Richards, regardless of the
pressure imposed on them, still, they would not have made an extension in the fiscal year
or even consider the backdating of the contracts. Rather, they would include the Board in
the day to day aspects of the business so that they have the real picture of what is really
happening in the market.

In this approach, they will understand that the aggressive sales target and
expected revenues they forecasted are not realistically attainable. Hence, the group will
encourage them to set a more feasible goal. The group will convince the board of
directors that they need not be so competitive with the estimates of Wall Street since the
company is growing rapidly compared to others but, instead, focus on developing

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strategies that will achieve the targeted sales for the quarter. Also, preparing a
presentation that can raise awareness of the possible consequences of such actions,
considering what happened to previous companies like Enron, will greatly help in
convincing the top management. This will include many suggestions such as creating a
strong legal team to ensure that the company will be able to achieve its goals without
breaking the law and hiring independent auditors to make sure that the financial
statements are presented fairly and in conformity with GAAP before it will be issued to
the public.

The group would also want to impose proper decision-making so that the
management would stay true to its goals without further violating any rules and
principles. It may take the company a long time before it reaches their target, but at least
it is with a clean conscience and without suffering the consequences of being charge of
fraud and spending time in jail.

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