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: