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.
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?