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New York Times, May 8, 2001:

Error in Type Gets Blame for Inflating Profit


Computer Associates said yesterday that a typographical error had caused it to overstate its annual profit by about $130 million in a news release last month. The company said that under standard accounting rules it earned 16 cents a share, or about $90 million, for the year ended March 31, excluding certain charges.

In the earlier release, issued on April 16, the company said it earned 40 cents a share, or about $230 million. Computer Associates did not provide exact dollar amounts in either the April release or yesterday's correction. The mistake occurred, the company said, "when the preparer of the press release chart inserted the wrong number from the computation sheet."

Computer Associates said the mistake did not affect the earnings that it reported under its "pro forma, pro rata" accounting method, which it adopted in October along with a new business model. Under that method, Computer Associates reported a profit of $1.61 a share, or about $930 million.

In an article in the Money & Business section of The New York Times on Sunday, former employees and independent analysts were quoted as saying that the company had used accounting manoeuvres to overstate its sales and profits for years. The accounting switch and new business model are an effort to hide that fact, they said.

Computer Associates, which dominates the market for mainframe utility software, programs that help big computers run smoothly, denies the accusations and says it stands by its accounting practices. Shares in Computer Associates, based in Islandia, N.Y., have fallen 13 percent since the article was published. They rose 94 cents yesterday, to $30.70.

The April 16 error is not the first overstatement by Computer Associates in a news release. On May 15, 2000, the company reported "revenue of $2.13 billion, an increase of 31 percent over the $1.63 billion reported in the previous year's fourth quarter." The company's fiscal year ends in March.

Three weeks later, in a filing with the Securities and Exchange Commission, Computer Associates said its sales were $1.91 billion. It said the higher figure in the news release equaled the total value of the contracts the company had signed in the quarter, but that the figure double- counted some revenue the company had booked in previous quarters.

Computer Associates said yesterday that the higher figure was also a valid estimate of its revenue, even though it double-counted revenue that had already been reported.

Meanwhile, SEC Insight, a private company that files Freedom of Information Act requests with the S.E.C., said it had discovered two inquiries into Computer Associates.

In September 1998, the S.E.C. raised questions about the company's accounting practices. In addition, the S.E.C. began a separate investigation into the company's earnings warning in July 1998, which caused shares to plunge a few weeks after three executives received a $1.1 billion payout tied to the stock price.

Computer Associates said that it had responded to the S.E.C.'s concerns about its accounting and that it did not know whether the inquiry into its 1998 warning was still open. The S.E.C. declined to comment.

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