Tuesday, 21 June 2011

CSC's Nordic accounting irregularities reach $91million, but key questions remain

CSC filed its FY2011 10K Annual Report with the SEC on June 16.

It told us that

a) the Nordic accounting irregularities overstated FY2010 profit by a massive $91million,

b) most of the irregularities were expenses inappropriately capitalized as "Deferred contract costs"

c) substantially all the irregularities happened in FY2010


The irregularities were written off over the 4 quarters of FY2011, but some questions remain unanswered:


1. How could CSC Corporate management fail to notice irregularities which inflated profit by $91million in a small Region with an annual profit target of around $40million?.


A likely scenario is that the irregularities were needed to make Nordic look as if it had achieved its profit target. This would mean CSC Nordic in reality made a loss of $51million, but was reporting to Corporate a profit of $40million. How can a European or Corporate executive overseeing Nordic not be aware that a small Region was in reality missing its profit target by over $90million.? Yet CSC European HQ and Corporate apparently failed to notice anything unusual in Nordic's reported numbers! Curious indeed!!

2. What could have driven two experienced and trusted CSC executives to do what they did?

The 10K Report implies that the Nordic Chief Operating Officer (COO) and the Nordic Chief Financial Officer (CFO) are suspected of being at the center of the irregularities. Both were expatriates handpicked by CSC and sent from CSC UK to manage the Nordic business. The COO, the highest ranking CSC executive in Nordic, was a 20 year CSC veteran with a consistently good performance record.

Has CSC asked itself what could possibly drive trusted executives who were put on special expatriate assignment to the region to act in this way? Could they have "cracked" under unrelenting pressure from CSC Corporate to achieve the impossible profit targets which had been imposed on them?

3 What actions, if any, has CSC taken to remedy the Finance managerial shortcomings which the Nordic episode has highlighted?


Fully six months after CSC CFO Michael Mancuso told analysts and investors that the Nordic problems were fixed, CSC's Audit Committee showed how much confidence they had in that statement by instigating an independent investigation in May 2011.


CSC remedial measures in Nordic included the termination, resignation or redeployment of over half of the local finance staff. These employees are paying a high price for the actions of the management which CSC selected. But what is CSC doing to address the Europe and Corporate Finance management errors and failures which allowed the Nordic irregularities to go undetected for so long?

These errors and failures include:

a) Dismantling the European Headquarters Finance group which undertook critical Corporate oversight activities to save costs some 2 or 3 years ago.

b) CSC's inability to retain senior finance staff
in Europe over the past years.

c) Basic Controllership disciplines like account reconciliations and balance sheet reviews becoming so inadequate that CEO Michael W Laphen and CFO Michael J Mancuso felt unable to certify the integrity of CSC's financial statements for part of FY2011.

But unlike half of the Nordic finance staff, the European and Corporate executives responsible for these errors and failures escape accountability and carry on.

The full 100 page FY2011 SEC 10K report can be viewed at:
http://quote.morningstar.com/stock-filing/Annual-Report/2011/4/1/t.aspx?t=XNYS:CSC&ft=10-K&d=666df9bd81b04b6a8af29ea715dabadc

10 comments:

Janne Firskov said...

Hmmmm !
What is Nordic anyway ? I believe CSC defines Nordic as : Denmark, Norway, Sweden, Finland and Lithuania.
By memory, Denmark is the largest and Lithuania and Finland the two smallest. So if CSC Nordic has irregularities, which one of its countries can claim to attribute to this state of matters ?
It would be interesting to see which numbers shows up in which FY annual report. I know the 'CSC Denmark' annual report for FY2010 hasn't been updated since Sep. 13, 2010 (according to official government site. For CSC Denmark, that would be this : http://cvr.dk/Site/Forms/PublicService/DisplayCompany.aspx?cvrnr=15231599)
At the time of irregularities, that must be around 2009-2010, the CEO of CSC Denmark didn't change, and is now even promoted as the COO for CSC Nordic.
But, if the irregularities doesn't come from CSC Denmark, then the figures becomes even worse, compared to revenue and profits for those Nordic CSC countries in question. So the ball keeps rolling...

Samwise said...

The auditors have now signed off on the financials. They seem to beleive that the $90M is isolated to the nordic region. Arguably, to a company that has $16B in annual revenues, $90M isn't even material. Couldn't this just be an isolated event by rogue employees? As for the NHS contract, everyone knew that it was in danger. Not really new news. Finally, we're in a global recession that is only now hitting governments much harder than any other group. Literally all of CSC's revenues come from the government. I don't find any of this disturbing or completely unexpected. Am I missing something?

Anonymous said...

Samwise, you are comparing profit before tax to sales in saying the Nordic $91million irregularities in FY2010 are immaterial.

CSC's Net income before tax that year was $813million of which 11% ($91million) was pure fiction. With CSC's operating income % of 6% it required over $1.5billion of revenue to recover the lost $91million. I don't view that as immaterial.

I agree that the whole industry is suffering due to the recession, but CSC more than its major competitors CSC's revenue in FY2011($16)billion is $500million lower than FY2008, the year when Laphen became CEO. CSC is not helped by the recession, but poor management is also a major reason in the lack of revenue growth.

Anonymous said...

Based on the 10-K, isn't it possible that up to $41m of the irregularities occurred in fiscal years prior to 2009, but were negated by the $40m increase in income that was also reported as an out of period adjustment? In that sense, the 10-K is quite hazy about when exactly the irregularities occurred.

Anonymous said...

Laphen & his cronies are doing all they can to 'prove' that they were not responsible for the Nordic irregularities - completely ignoring the intolerable pressure they put the regions under. Refusing to accept repeated warnings of unachievable targets, growing cost issues and demanding improved financials - is it any wonder people cracked?
And what of the Sarbanes-Oxley requirement of senior mgmt that budgets/forecasts be challenging but not unrealistic - no CSCer would recognise any of the past few years budgets (all of which are arbitrarily 'challenged-up' by the Corporate Office late in the process) as having any basis in reality, given the chronic lack of strategic investment & training over the past years...

Anonymous said...

In a review, by an external consultancy brought in to review the 'culture' of CSC's Finance team at the request of a head of finance who stayed less than a year, a 'bully' culture was uncovered. It does make you wonder if being bullied to publish figures makes professional accountants behave in this way.

Anonymous said...

Dear last Anonymous,

Where and when was this review of bullying carried out?

Anonymous said...

Anyone know the name of the consultancy company involved?

Anonymous said...

Deloitte

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