Responses vary to accounting woes - East Valley Tribune: Business

Responses vary to accounting woes

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Posted: Sunday, May 2, 2004 7:29 am | Updated: 5:32 pm, Thu Oct 6, 2011.

NEW YORK - Though it sounds odd to praise any company mired in accounting turmoil, the decisive response by Nortel Networks in firing its chief executive is something of a good sign.

It certainly signals more determination to put investors first than Computer Associates displayed in merely demoting its CEO under similar circumstances.

Neither of the two former chief executives, Frank Dunn at Nortel and Sanjay Kumar at Computer Associates, have been accused of any crime relating to the improper financial practices which have dogged both companies.

But the message from Nortel on Wednesday — when the board fired Dunn, chief financial officer Douglas Beatty and controller Michael Gollogly — was that top executives should be held accountable for what occurs under their stewardship.

Compare that with Computer Associates, where the board generously cushioned Kumar’s fall with a new title that suggests he will remain an influential force within the software company.

Kumar, only 42, was named ‘‘chief software architect’’ last week after he resigned as chairman and CEO amid a federal accounting probe that has now prompted a $2.2 billion restatement of revenue and guilty pleas by four other executives.

More troubling in the decision to keep Kumar on the payroll have been strong suggestions by prosecutors that he may be one of two highranking executives implicated in the criminal probe as part of the guilty plea by former chief financial officer Ira Zar. And as part of the restatement, Computer Associates disclosed that revenue was also manipulated during a period in which Kumar and two other top executives received a controversial $1 billion bonus.

Even with the presumption of innocence, it is clear after four years at the helm that Kumar has been ineffectual in setting a new ethical tenor among the rank-and-file at this long-troubled company.

‘‘They should make a clean cut and not be associated with him anymore,’’ said Itzhak Sharav, an accounting professor at Columbia Business School. ‘‘Nortel did what they’re supposed to do in a situation like this. The message they are sending is strong one — that they intend to conduct their affairs in a different way.’’

Granted, from some perspectives, Kumar can still be viewed as a valuable strategic asset: A 17-year veteran who’s been intimately involved with developing the company’s technology and forging relationships with key customers.

But it is precisely because Kumar’s imprint is so deeply embedded on the corporate personality that it might have been heathier for the board to decide his services were no longer required.

While Nortel’s accounting missteps were revealed last October, Kumar’s entire fouryear tenure at the helm had been clouded by nagging complaints about the company’s accounting practices.

From the start, one of Kumar’s stated priorities as CEO had been to resolve those questions and restore the company’s credibility with industry analysts and investors. The change in command drew so much attention that Harvard Business School published two case studies on the challenge Kumar and his team faced.

Instead of cleaning things up, Kumar’s initiatives, including a confusing switch to a new business model, fueled new consternation among investors.

A federal investigation disclosed in early 2002, still ongoing, prompted shareholder suits which Computer Associates settled in mid-2003 at a cost of $144 million to the company.

It should also be noted that Kumar’s record as a proxy for shareholder interests is hardly unblemished. In 1999, Kumar was one of three executives along with Computer Associates founder Charles B. Wang and board director Russell M. Artz agreed to return part of a stock bonus valued at more than $1 billion. Those bonuses had been awarded in 1998 only months before Computer Associates put out a news release warning of a spending slowdown by its corporate software customers.

It’s never easy, of course, for a board of directors to send a long-time executive packing.

That’s why Nortel’s rapid response to its predicament is all the more impressive: Frank Dunn was still in his teens when he joined the company, then named Northern Telecom, in 1976.

‘‘The decision to terminate Frank Dunn was particularly difficult, but it is the right decision for the company,’’ chairman Lynton (Red) Wilson, said Wednesday. ‘‘Under new leadership, the board believes we will be better positioned to put the accounting issues behind us, restore confidence in the company’s financial reporting and take advantage of the company’s strong market position.’’

Though it is troubling that there are other examples to note, this is not the first time Nortel’s board has shown itself forthright and decisive when confronted with embarrassment.

Last October, when the company revealed it had overstated pre-tax profits by $900 million, management put out a straightforward news release that avoided much of the obscure terminology often used in accounting. Similarly, in early 2002, Nortel moved quickly to force the resignation of its chief financial officer when it was revealed that he was being investigated for possible insider trading violations.

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