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A Letter from Prison Case Solution

Solution Id Length Case Author Case Publisher
2422 1452 Words (6 Pages) Eugene Soltes Harvard Business School : 110045
This solution includes: A Word File A Word File

The case, A Letter from Prison, revolves around an Accounting Fraud that was committed by an executive of Computer Associates named Richard. Computer Associates offers different software products to its customers. It charges a licensing fee, and the majority of revenue is normally recorded in the final week of the quarter. Richard was responsible for overlooking the timing of signing contracts and the receipt of payment from those contracts. After the company's management could not accurately forecast quarterly earnings for the year, it warned the sales team about the shortfall in revenue. The accounting department recorded sales in the current quarter, which was not under GAAP as they should have been recorded in the next quarter. While this increased Computer Associates' earrings, it caught the attention of investigative authorities, and Richard was found guilty. On the other hand, according to a letter that Richard wrote, he does not deem his irresponsibility to be a big deal compared to other scandals in the history of accounting, such as WorldCom bankrupt and Enron bankrupt.

Following questions are answered in this case study solution

  1. How serious was Stephen Richard’s actions? Why?

  2. If Computer Associates achieved the same financial results using GAAP flexibility, does your answer to question 1 change?

  3. Suppose you were placed in Stephen Richard’s position at Computer Associates and were under pressure to extend the fiscal quarter. How would you handle the situation differently?

  4. Does it matter what your competitors are doing?

Case Analysis for A Letter from Prison

1. How serious were Stephen Richard's actions? Why?

Stephen's actions were gravely serious as he used targets set by outside parties such as the analyst community to please them instead of keeping the Generally Accepted Accounting Principles (GAAP) in consideration when deciding regarding the financial responsibilities of Computer Associates. Under the execution of Richard, instead of recording sales in the next quarter, the accounting department recorded the sales in the current quarter. As per the investigative authorities, this decision was not coherent with the GAAP.

Moreover, as per the U.S. Securities and Exchange Commission, Richard did not pay attention to his financial responsibilities and actively engaged and allowed his subordinates to get into contracts even after the quarter had ended. It is evident that if Computer Associates improperly recognized revenue from those contracts, without alerting the accounting department of Computer Associates, it was Richard's neglect as salespeople reporting to him were getting into contracts consisting of signatures signed on dates that were backdated after quarter-end. These practices were not under GAAP principles. 

According to the letter Richard wrote, he believes his actions were motivated by the constant pressure of upper management. However, it does not negate the fact that instead of improving the performance-driven culture that prioritized sales, Richard's actions led to increased earnings reported by Computer Associates. Richard had meetings with the CFO after the fiscal quarter had ended. They discussed revenues made by Computer Associates, and "the three window" process they used to ensure Computer Associates had generated enough revenue to match its quarterly projections was also against the GAAP principles. Despite being in a position where he could make these wrongdoings right and report them, he acted otherwise. Hence, he was found guilty and got sentenced to 7 years imprisonment. 

2. If Computer Associates achieved the same financial results using GAAP flexibility, does your answer to question 1 change?

My answer to question 1 does not change even if Computer Associates achieved the same financial results using GAAP flexibility. The culture that was being encouraged by the management of Computer Associates was a performance-driven one that prioritized sales instead of one that would curb fraud in the organization. This encouragement of a target-driven culture is an ultimate loss to shareholders. It also violates several other reporting and accounting rules; hence, it remains unacceptable.

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