Computer Associates Shares Drop Over 17% on Profit Questions

Shares of Computer Associates International Inc. fell more than 17% Wednesday following reports of a federal inquiry into whether the company deliberately overstated profit to inflate its stock price and enrich senior executives.

Federal prosecutors and the FBI have opened a preliminary inquiry into the Islandia, N.Y.-based software company’s books, Newsday reported Wednesday, citing sources close to the investigation.

A spokesman for the U.S. attorney’s office in Brooklyn refused to comment on the report.

The news comes as corporate accounting practices have come under new scrutiny after the collapse of Enron Corp.

Newsday reported that investigators are examining whether the company has properly distinguished between revenue it receives from the sale of software and the fees it charges to service, upgrade and maintain software products.

Former employees have said that Computer Associates began using pro forma accounting, a practice that can make profit seem larger, the New York Times reported on its Web site Wednesday.

In April, the Times questioned the company’s accounting practices, alleging that it had overstated its revenue and cash flow in recent years.

Computer Associates officials said the report contained misleading and “at times false” information.

Computer Associates, which makes software that helps run big mainframe computers for corporate clients, has reported its financial results on a pro forma basis since October 2000.

The company also continues to report its results under regular accounting rules.

But because of a change Computer Associates made in its contracts when it began using pro forma accounting, the standard results are essentially meaningless for investors, critics have complained.

In a statement early Wednesday in response to the Newsday article, Computer Associates said, “We have not been contacted by the authorities regarding any investigation and do not know what, if anything, is being investigated. The reporting of our financial results has always been in accordance with all applicable accounting principles.”

Shares of Computer Associates fell $4.40 to close at $20.91 on the New York Stock Exchange, where it was one of the most actively traded issues.