The fragile turnaround at Sybase was shattered yesterday when the relational database supplier uncovered accounting abuses by its Japanese subsidiary which will force it to restate its 1997 financial results.
The company was due to report fourth quarter figures yesterday that were already set to fall short of Wall Street expectations following weak sales in North America. But the market was shaken when the supplier abruptly postponed that announcement that an audit by Ernst & Young had exposed revenue recognition irregularities by Tokyo-based Sybase KK.
The knock-on effect of these irregularities - which appear to be confined to Japan - is that the company?s fourth quarter results will fall "substantially below" expectations at between $60 million and $65 million.
But the long term impact will be greater as the company will have to restate its entire 1997 results to take account of the breaches while 1998 forecasts will have to be adjusted to accommodate the real financial condition of the company.
Kertzman could not rule out lay-offs in other regions of the world as well as Japan in order to restore the company to financial stability.
Five senior executives at Sybase KK - the president, two sales managers and two financial officers - had closed deals with customers using sideletters which allowed for the return of some or all of the software. Such sideletters are not illegal in themselves, but revenue from such deals cannot be recognised on a balance sheet.
"There has been a clear violation of the conservative revenue recognition practices used by Sybase," admitted company chief executive Mitchell Kertzman. "I am so angry, I am so pissed off by this. Sybase has always taken a leadership position in reshaping the software industry?s revenue recognition practices." The five executives - all of whom have resigned or been sacked - conducted most of the sideletter deals in the latter half of 1997, with the frequency of such arrangements increasing as the economic crisis in Asia Pacific made business increasingly difficult to do. Although investigations are still ongoing, it is believed that no such deals were conducted prior to 1997.
The malpractice was exposed last week during a year end audit by Ernst & Young which discovered an irregular cash account appearing towards the end of the third quarter. When this was queried, it led to a wider investigation which exposed the sideletter-driven deals. Sybase and Ernst & Young are now re-examining the acounts of all subsidiary operations, but have no uncovered any occurrence of false accounting anywhere else in the world.
Sybase president and chief operating officer John Chen has flown to Tokyo to investigate with officials from Ernst & Young and Sybase?s own legal and financial staff. Deals with Japanese customers will be investigated and put on a legal footing, while future contracts in the region will be conducted on a cash-only basis.
Kertzman said the company expected to take legal action against the five individuals, but admitted that he was unclear what form Japanese law would allow such action to take. "It is annoying to me that five misguided individuals can be allowed to case aspersions on the integrity of the 5,000 [who work for Sybase worldwide]," he said.
He said that he and the US senior management team had reexamined all internal company guidelines on revenue recognition to see whether it was possible that there had been some form of communications breakdown or cultural misunderstanding that led the Japanese executives to behave as they did. But he concluded: "There is zero chance of miscommunication. The people in Japan effectively owned up."
But he rejected comparisons with rival database supplier Informix, whose own irregular revenue practices led to it restating several years worth of results. In Informix case, the abuses were worldwide, noted Kertzman, which indicated a fundamental problem with the corporate culture, whereas with Sybase it was limited to a small group of people in one region.
The company will reveal the full extent of the damage next Wednesday when it releases it full year results. North America is known to have performed poorly, but Europe - once the company?s biggest troublespot - is believed to have met its expectations.
For Kertzman, it was a particularly difficult day since it was also his 49th birthday. "I?ve had better birthdays," he noted. "They blew out my candles from Japan."
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