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An Analysis of A Letter from Prison

Decent Essays

1. How serious were Stephen Richards’ actions? Why?
Stephen Richards’s actions were extremely serious; manipulating Computer Associates’ quarter end cutoff to align CA’s reported financial results with market expectations by violating the generally accepted accounting principles and their financial reporting responsibilities. According to the U.S. Securities and Exchange Commission, Richards with other CA executives extended CA’s fiscal quarter, “ instructed and allowed subordinates to negotiate and obtain contracts after quarter end while knowing, or recklessly disregarding the fact that, CA would improperly recognize the revenue from those contracts, and failed to alert CA’s Finance or Sales Accounting Department that CA salespersons …show more content…

Under Generally Accepted Accounting Principles (GAAP), four conditions were required to be met in order for revenue associated with a software license agreement to be recognized: 1- persuasive evidence of an arrangement was required to have existed, 2- delivery of the licensed products was required to have occurred, 3- the license fee was required to have been fixed or determinable, 4- the collectability of the license fee was required to have been probable.
Computer Associate did not sell or transfer title of its software products to its customers. Instead CA licensed its software products pursuant to license agreements by which CA’s customers agreed to pay a one-time license fee and annual usage and maintenance fees. Therefore, under GAAP, in order for CA properly to have recognized revenue from a license agreement in a particular fiscal quarter, the license agreement was required to have been signed by both CA and its customers within that quarter, which happened to be manipulated by CA’s executives. (NY)
In addition, as a public company, CA was required to comply with the rules and regulations of the United States Securities and

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