Computer Associates 2006 Annual Report Download - page 81

(ii) The Company’s policies and procedures relating to controls over the accounting for sales commissions
were not effective. Specifically, the Company did not effectively estimate, record and monitor its sales
commissions and related accruals. The Company also did not reconcile its commission expense accrual
to actual payments on a timely basis. These deficiencies resulted in a material error in the recognition of
commission expense, which resulted in a restatement of the interim financial statements for the three and
nine-month periods ended December 31, 2005.
(iii) The Company’s policies and procedures relating to the identification, analysis and documentation of
non-routine tax matters were not effective. The Company’s tax function also did not provide timely
communication to management of its assumptions regarding certain non-routine tax matters. This
deficiency resulted in a material error in the recognition of taxes associated with the Company’s cash
repatriation, which occurred in the fourth quarter of fiscal year 2006.
(iv) The Company’s policies and procedures relating to the accounting for and disclosure of stock-based
compensation relating to stock options were not effective. Specifically, controls including monitoring
controls, were not effective in ensuring the existence, completeness, valuation and presentation of the
Company’s granting of stock options, which impacted the Company’s determination of the fair value
associated with these awards and recognition of stock-based compensation expense over the related vesting
periods from fiscal year 2002 through fiscal year 2006. This deficiency resulted in material errors in the
recognition of compensation expense, additional paid-in capital, deferred taxes and related financial disclosures
relating to such stock options, which contributed to a restatement of annual financial statements for fiscal years
2005 through 2002, and for interim financial statements for fiscal years 2006 and 2005.
(v) The Company’s policies and procedures were not effectively designed to identify, quantify and record the
impact on subscription revenue when license agreements have been cancelled and renewed more than
once prior to the expiration date of each successive license agreement. This deficiency resulted in
material errors in the recognition of revenue, which contributed to a restatement of annual financial
statements for fiscal years 2005 and 2004, and for interim financial statements for fiscal years 2006 and
2005.
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.
In conducting the Company’s evaluation of the effectiveness of its internal control over financial reporting,
management has excluded the acquisition of Wily Technology, Inc., which was completed by the Company during
the fourth quarter of fiscal year 2006. Wily Technology, Inc. represented approximately $431 million of the
Company’s total assets as of March 31, 2006 and approximately $3 million of the Company’s total revenues for the
year then ended. The assets of Wily Technology, Inc. included approximately $232 million of goodwill and
$126 million of other intangibles as of March 31, 2006.
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. 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 2006, the Company was engaged in an ongoing review of its internal control
over financial reporting. Based on that review management believes that, during the fourth quarter of fiscal year
2006 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.
Changes under the DPA
As previously reported, and as described more fully in Note 7, “Commitments and Contingencies”, of the Notes to
the Consolidated Financial Statements in this Annual Report on Form 10-K for the fiscal year ended March 31,
2006, in September 2004 the Company reached agreements with the USAO and SEC by entering into the DPA with
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