Computer Associates 2005 Annual Report Download - page 82

Table of Contents
because of their likely significant negative effect on internal control over financial reporting, are to be regarded as at least significant
deficiencies as well as strong indicators that a material weakness exists. These indicators include the restatements of previously issued
financial statements to reflect the correction of misstatements. Management has identified material weaknesses as of March 31, 2005
related to the restatements of its financial statements and an ineffective control environment in EMEA.
Material Weaknesses in Internal Control over Financial Reporting Relating to the Restatements of Financial Statements and an
Ineffective Control Environment in the Company’s EMEA Region
(i) At March 31, 2005, the Company did not have policies and procedures over the accounting for credits attributable to software
contracts executed under the Company’ s prior business model that were sufficient to prevent or detect the improper accounting for
credits initially established under side agreements entered into during fiscal years 1998 through 2001. As a result of this deficiency, the
Company’ s internal control over financial reporting did not detect the material misstatements that were made as a result of the prior
period accounting errors related to the entry into the aforementioned side agreements. In May 2005, the Company announced that it
expected to restate its financial statements for fiscal years 2004 through 2002, and to make appropriate adjustments in its interim
financial statements for fiscal year 2005, to eliminate the effects of certain prior-period accounting errors. Certain of these errors resulted
from software license agreements that the Company entered into in fiscal years 1998 through 2001 which were altered by side
agreements that, if correctly accounted for, would have prevented the full recognition of related revenue until later periods. Reference is
made to Note 12 (a) to the Consolidated Financial Statements for further discussion of the financial impact of this restatement.
(ii) Since the Original 2005 Form 10-K was filed on June 29, 2005, an additional material weakness in the Company’ s internal control
over financial reporting as of March 31, 2005 has been identified. At March 31, 2005, the Company did not have policies and procedures
to identify, quantify, or record the impact on subscription revenue when a prior business model license agreement (i.e., license
agreements entered into before October 2000 that resulted in upfront software license revenue recognition) was superseded by a
subscription based license agreement prior to the expiration of the prior business model license agreement. Subsequent to the filing of
the Company’ s Original 2005 Form 10-K, the Company determined that there was an accounting error in that the revenue recorded on
renewals of certain prior business model license agreements, when superseded by a subscription based license agreement prior to the
expiration of the prior business model license agreement, was not always recorded on a straight line basis over the life of the new
subscription based license agreement. In October 2005, the Company restated its financial statements for fiscal years 2005 through 2002,
and for the interim periods in fiscal years 2005 and 2004, to reflect the correction of these accounting errors. This restatement is
discussed further in Note 12 (b) to the accompanying consolidated financial statements.
(iii) At March 31, 2005, the Company had an ineffective control environment in its EMEA region. During fiscal year 2005, members of
management in the Company’ s EMEA region failed to support consistent application of policies and procedures and to foster a culture of
integrity and high ethical standards in the region. This resulted in overlooking of conduct involving conflicts of interest with the
Company relating to the use of vendor services, overriding Human Resources’ procedures and attempts to frustrate and discourage the
reporting and investigation of improper conduct.
Each of the aforementioned material weaknesses in internal control over financial reporting individually resulted in more than a remote
likelihood that a material misstatement of the Company’ s interim or annual financial statements would not have been prevented or
detected.
Management had previously concluded that the Company did not maintain effective internal control over financial reporting as of
March 31, 2005 because of the existence of the material weaknesses described in (i) and (iii) above. In connection with the restatement
of the Company’ s consolidated financial statements described in Note 12 (b) to the consolidated financial statements, management has
determined that the material weakness described in (ii) above also existed as of March 31, 2005. Accordingly, management has restated
this report on internal control over financial reporting to include this additional material weakness.
The Company’ s independent registered public accountants, KPMG LLP, have audited and issued a report on management’ s assessment
of the Company’ s internal control over financial reporting (as restated). That report is included on the page set forth in the List of
Consolidated Financial Statements and Financial Statement Schedules.
(c) Changes in internal control over financial reporting
During the fourth quarter of fiscal year 2005, the Company was engaged in an ongoing review of its internal control over financial
reporting as described below. Based on that review management believes that, during the fourth quarter of fiscal year 2005 there were
changes in the Company’ s internal control over financial reporting, as described below, that have materially affected, or are reasonably
likely to materially affect, those controls.
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