Mike Lawrie got the Christmas present he wanted this week - a proposed settlement of the SEC investigation into accounting irregularities between 2009 and 2012 in the Nordic region, Australia, and the UK NHS contract.
The terms of the proposed settlement are less important than the fact that a significant uncertainty - one which could deter a potential buyer – will be closed, improving the prospects of a sale of CSC.
As a result of the settlement, CSC will pay a penalty of only US$190million and initiate a review of its compliance policies. The latter should have been done by now anyway. In our opinion, this “punishment” is little more than a tap on the wrist for CSC.
The SEC concluded that CSC should have booked the US$1.16 billion NHS impairment charge in FY2011 rather than FY2012. No surprise. We and others had reservations about CSC’s handling of the NHS contract well before 2012. Following on from this, CSC will also move the related US$2.51 billion of goodwill impairment from FY2012 results into FY2011. The net income of FY2010 will also be restated downwards by US$50million reflecting the impact of the Nordic accounting irregularities.
Further details of the proposed settlement of the SEC investigation can be found here or at;
So what does all this mean?
- Mike Lawrie has removed a significant balance sheet and earnings risk that arose well before his arrival at CSC. He will likely be congratulated on having negotiated such a good settlement.
- There is some restating of the timing of historical events, but no investor is likely to care about that.
- The shareholders who suffered between 2009 and 2012 now see their investments worth over US$60 per share.
- A number of employees directly involved in the irregularities were reprimanded, suspended or terminated.
So is all well that ends well?
We think not !
The European and Corporate Presidents and other executives on whose watch these irregularities occurred have not, as far as we are aware, been held accountable for these failures. Instead, they were richly rewarded, receiving large amounts in direct compensation and termination packages. The risk of lawsuits against them is now almost certainly passed.
Meanwhile many honest hard-working employees who had no connection at all with any of these failures and irregularities lost their jobs in the aftermath. But who cares about them?