Indus International, a computer software maker, moved to Atlanta from the frenzy of Northern California's high-technology scene earlier this year, after it paid US$4.3 million to settle a passel of investor lawsuits accusing it of fraudulently overstating revenue.
Executives of the once-profitable company, which sells software and services to help large corporations manage their assets, say they are confident that its revenue growth is back on track and that its bookkeeping problems are history.
PHOTO: NY TIMES
But Indus International is not out of the woods. Not yet.
Back in San Francisco, officials of the Securities and Exchange Commission and the Justice Department are completing parallel investigations of the accounting methods used by the company in late 1999 that led to the investor lawsuits. They are expected to announce their findings late this month. People close to the investigation said that both civil and criminal charges against the company and former employees were under consideration in the case.
Indus, in a document filed last week with the SEC, disclosed that it had been cooperating with the SEC's formal investigation and had offered to settle the matter without admitting or denying wrongdoing. J. Michael Highland, chief financial officer of Indus, said the company otherwise had no comment on the SEC and Justice Department investigations.
Responding to widespread concerns that investors were not always given reliable financial information in that time of frantic revenue growth, regional offices of the SEC, the Federal Bureau of Investigation and the US attorney's office here are cooperating in a legal crackdown on accounting violations.
Over the last four years, nearly one in five accounting restatements -- red flags for potential misconduct -- have been by companies in California, according to a study by Arthur Andersen, the accounting firm. (Arthur Andersen was itself the recent subject of an SEC civil sanction for the way it audited the books of Waste Management, the trash-disposal company, and agreed to a settlement without admitting or denying civil fraud allegations.) In the same four-year period, the total number of restatements for all industries has nearly doubled, Arthur Andersen's report said.
So far in the technology sector, federal investigators and prosecutors here have set their sights on relatively small companies, where a high proportion of problems center on what accountants call improper "revenue recognition" -- the recording of revenue that does not exist. It could be, for example, from a pending sale that is misclassified as completed, or a service contract in which money has not yet changed hands.
The Arthur Andersen study of accounting restatements from 1997 to 2000 showed that 27 percent of the restatements nationwide had been filed in the software and computer industries. About 62 percent of the software companies involved had annual gross revenue of less than US$100 million.
The rise of accounting fraud investigations, specifically related to overstatement of revenue, reflects a serious white-collar crime trend in the high-technology sector in recent years, said Leslie Caldwell, chief of the securities fraud section for the US attorney's office here.
"The pressure to do this in the technology industry was intense because the expectation for growth was so high, and it wasn't sustainable," she said, without commenting on specific cases.
The inquiry at Indus International focused on revenue for the third quarter of 1999. According to the shareholder lawsuits against the company and former executive, the revenue total included sales derived from "irregular contracts," money that was not received during the quarter in question. Last October, Indus International agreed to settle the suits for US$4.3 million without admitting or denying wrongdoing.
Previously, Caldwell said, her office waited for the SEC to refer cases for criminal investigation. But now, "we're taking the bull in our own hands," she said.
"There are a number of matters under investigation of corporations that cooked their books to meet Wall Street's expectations -- expectations that the companies themselves created," she added.
Harris Miller, president of the Information Technology Association of America, a trade group, said accounting problems in the software industry had arisen because of what he called vague rules covering sales of licensing agreements, which resulted in many companies claiming revenue that they expected to receive.
"The rules for revenue recognition were a bit cloudy, not just for software companies but for any company that delivers services over time," Miller said. His organization, he said, was not making excuses for executives who intentionally violated regulations. "Yes, there was pressure to drive the top line," he said. "But you can never justify misconduct."
Caldwell's unit of seven lawyers, responsible for expediting complicated and paper-intensive securities investigations, was created in February 2000 by Robert Mueller, US attorney for the Northern District of California, whom President Bush chose to serve as director of the FBI.
Matthew Jacobs, a spokesman for the US attorney's office here, said Mueller had made the prosecution of accounting fraud a major objective because of its prevalence in both economic booms and declines. Mueller was not available for comment, the US attorney's office said on Friday.
In its most prominent case to date, Caldwell's team obtained indictments last September against two former executives at McKesson, the pharmaceutical and medical technology company based here. The defendants were charged with accounting fraud related to the 1999 merger of McKesson and HBO & Co, a software company based in Atlanta. Prosecutors said $9 billion in shareholder losses resulted. The defendants pleaded not guilty to the charges, and the case is in the pretrial phase.
The FBI and federal prosecutors here are investigating about 50 cases of possible criminal securities fraud in the district, more than a dozen of them focusing on companies suspected of accounting fraud.
Six small and medium-size software companies in Northern California are ALSO under federal criminal and civil investigation, according to officials. Among them is Critical Path, a San Francisco company that sells e-mail messaging technology to other businesses and reported US$135.7 million in sales last year. In February, after an internal investigation that led to the departure of its chief executive and two other executives, Critical Path restated revenue for the third and fourth quarters of 2000, subtracting a total of US$19.4 million from what it had claimed.
The company's share price plummeted and class-action suits were filed, contending deception and fraud. Critical Path has said it is cooperating with investigators.
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