This case study is worth 20 marks (20%) towards total assessment
Case Study - Letter from Prison
Q1. How serious were Stephen Richards’ actions? If Computer Associates achieved the same financial results within “allowed accounting flexibility”, will this change your answer?
Q2. Richards describes how difficult it is to operate in the “gray areas of accounting” and wanted more guidance from senior management. Do you agree or disagree with him? If you were placed in the same position as Richards, how would you handle the situation? What are the options that you think you would face in deciding what to do?
Q3. Step back and consider management’s incentives and choices. What are Computer Associate’s motivations to manage earnings and the financial value represented by the statement of financial position? What type of corporate governance structures in firms have been identified by the research as a flag, or indicator, that a firm is more likely to manage/manipulate financial accounting outcomes?
Q4. Comment on the GAAP standard that allows software firms to recognize the entire value of the licensing contract as revenue in the quarter that the contract was affirmed. Do you think this accounting treatment contributed to the culture at Computer Associates? Why or why not?
Q5. Exhibit 4 provides an overview of the inflated recorded revenue and EPS. Is it important for Computer Associates to meet analyst estimates? Why or why not?
Q6. Does accounting management/manipulation have an impact on stock prices? (Hint: What are the mechanistic and no-effect hypotheses in accounting?) What other evidence might you collect to analyse whether the actions of Richards in accelerated revenue influenced stock trading behaviour or provided information to investors in the stock market?
1. The word guideline is approximately 1500-2000 words in your initial answer to Q’s1-6 (total marks 15).
2. You should attempt all questions. However, these questions also provide you with considerable scope with the detail of your answers (see 3 below).
3. The answer to questions 2, 5 and 6 are greatly enhanced if you access some research articles that provide empirical results. You should access at least one-two of them to support your answers. Concentrate on the general results – you do not have to fully understand the models. Further guidance on how to approach this case study is available from the lecture on 20/21 April.
4. You should also pick one area in which you go into further detail in your answer (approximate words 500-700, marks 5). You should choose and clearly indicate which one you choose from one of the following extensions:
a. corporate governance and accounting management (Q3),
b. the importance of meeting analyst forecasts (Q5), or
c. the impact of accounting standards (either individually or the introduction of International Accounting Standards) on stock prices (Q6).(责任编辑：BUG)