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A Very Expensive Typo

Shaheen Pasha

It just doesn't seem to get any better for Sanjay Kumar's Computer Associates International Inc.

The company's stock fell over 9 percent on Monday after it reported that it had overstated its annual earnings on operations in April due to a typographical error.

On April 16, Computer Associates put operating earnings for the full year at 40 cents a share, or $230 million. But under standard accounting rules and excluding certain charges, the company earned 16 cents a share, or about $90 million.

The $140 million gap did little to bolster investor confidence, which has been shaken in recent days following a New York Times article that questioned the company's outlook and accounting practices.

"The market's reaction reflects an overall skepticism regarding the company," said Sarah Mattson, senior research analyst at Dain Rauscher Wessels.

Mattson said while the irregularity in earnings was not intentional, investors were viewing "Computer Associates with a jaundiced eye."

According to a Wall Street Journal report Monday, the company's financial chief, Ira Zar, said the error occurred after a number was incorrectly transcribed by an employee for a news release.

But despite the error, analysts are still sticking by the company.

John McPeake, a senior software analyst at Prudential, said the addition error involved figures for the fiscal year, and the numbers for the quarter "were all accurate."

"All it required was for someone to see that the numbers for the full year didn't add up," he said.

McPeake said the typographical error was not an attempt to camouflage anything in the company and investors have blown the error out of proportion.

A representative from the company was not available for comment.

Shares of Computer Associates recently changed hands at $28.68, down $2.02, or 6.6%, on volume of 3.6 million. Average daily volume is 3.4 million.

Despite the market's wariness toward Computer Associates, investors may want to view the company as a buying opportunity, analysts said.

"The error in GAAP accounting was pretty meaningless," said Kimberly Caughey, equity research analyst at Parker/Hunter Inc.

Prudential Securities Inc analyst John McPeake agreed, adding that investors should use this weakness -- caused by fallout from its earnings-per-share mistake -- as a chance to aggressively buy the stock.

Parker/Hunter's Caughey said The Times article did not fully highlight the company's move from an aggressive business model to a more conservative one -- a move which many analysts have embraced.

In October, Computer Associates, Islandia, NY, adopted a new revenue-booking system designed to conform with its new business model. The change caused fiscal fourth-quarter revenue to plunge on a year-to-year basis and prompted the company to issue what it calls 'pro forma, pro rata' results. These results showed the company having strong growth for that period; but results using more traditional accounting methods, also reported by the company, showed an operating loss.

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