Out of period adjustments

3 Months Ended

Jul. 01, 2011

Out of period adjustments [Abstract]

Note 3—Out of Period Adjustments

First Quarter of Fiscal 2012

During the first quarter of fiscal 2012, the Company’s Managed Services Sector (MSS) segment recorded five out of period adjustments primarily to cost of services, reducing income from continuing operations before taxes by $5 million which should have been recorded in prior fiscal years. Four of these adjustments totaling $4 million relate to MSS’ Nordic operations and $1 million to other MSS operations. The Nordic adjustments recorded in the first quarter of fiscal 2012 included two adjustments totaling $2 million which were attributable to an understatement of accrued expenses associated with vendor invoices related to fiscal 2011. These adjustments were identified late in the fiscal 2011 closing process, and due to the immaterial amounts involved, were not included in the Company’s consolidated fiscal 2011 statements. The Nordic adjustments also included (i) $1 million of outsourcing contract costs amortized over a contract term (including an extension rather than just the original contract term) attributable to fiscal 2006-2012, and (ii) a $1 million error in the accounting for an operating lease attributable to fiscal 2010. The $1 million operating lease adjustment is a refinement of an error previously corrected and reported in fiscal 2011. The $1 million adjustment related to other MSS operations was attributable to an understatement of accrued expenses in fiscal year 2011 due to an error in the calculation of management incentive compensation. In addition, MSS’ U.K. operations recorded a $4 million reclassification to reduce revenue and cost of services by offsetting amounts related to a fiscal 2011 fourth quarter adjustment resulting from a revised estimate at completion calculation. The Company attributes these adjustments to miscellaneous errors and not to any accounting irregularities or intentional misconduct other than the adjustment relating to the operating lease in the Nordic region, which the Company attributes to suspected intentional misconduct by certain former employees of our Nordic subsidiaries. The impact of these out of period adjustments was immaterial to the consolidated results, financial position and cash flows for the first quarter of fiscal 2012 and prior years. Consequently the cumulative effect of these adjustments was recorded during the first quarter of fiscal 2012. As the fiscal 2012 out of period adjustments were immaterial, they have not been incorporated with the fiscal 2011 discussion below.

First Quarter of Fiscal 2011

As further noted below, during fiscal 2011, the Company recorded various pre-tax adjustments reducing income from continuing operations before taxes that should have been recorded in prior fiscal years.

During the first quarter of fiscal 2011, based on information then known by the Company, the Company recorded certain pre-tax adjustments reducing income from continuing operations before taxes by $6 million ($1 million, net of taxes), that should have been recorded in prior fiscal years. As discussed below, these recorded adjustments comprised $21 million of charges reducing income from continuing operations before taxes originating out of the Company's MSS operations in the Nordic region, and $15 million of adjustments increasing income from continuing operations before taxes, principally out of other MSS businesses with $13 of the $15 million within MSS. These adjustments reduced MSS operating income (a non-GAAP measure) by $8 million as discussed in Note 12, Segment Information. The Company also recorded out of period income tax benefits in the first quarter of fiscal 2011 of $5 million, consisting of $4 million of income tax benefits related to the net out of period adjustments and $1 million of unrelated income tax benefit adjustments. These out of period recorded adjustments are primarily attributable to fiscal 2010.

Further out of period adjustments were identified in subsequent quarters of fiscal 2011. The aggregate fiscal 2011 adjustments (including those noted above with respect to the first quarter of fiscal 2011) reduced income from continuing operations before taxes by $51 million ($34 million, net of taxes). The total out of period adjustments reported in fiscal 2011 were comprised of $91 million of charges reducing income from continuing operations before taxes originating out of the Company’s MSS operations in the Nordic region, and $40 million of adjustments increasing income from continuing operations before taxes, principally out of other MSS businesses with $36 million of the $40 million within MSS. The Company also recorded out of period income tax benefits during fiscal 2011 of $17 million, consisting of $12 million of income tax benefits related to the net out of period adjustments and $5 million of unrelated tax benefit adjustments.

Nordic Region Adjustments: As part of closing the Company's financial statements for the first quarter of fiscal 2011, management identified and recorded out of period charges totaling $21 million in its Nordic operations. The $21 million of pretax out of period adjustments recorded in fiscal 2011 were attributable to:

(Amounts in millions)	Pre-tax Nordic Region Adjustment
Operating costs inappropriately capitalized	$	16
Misapplication of US GAAP		3
Miscellaneous errors		2
Total	$	21

In response to these errors, the Company initially made changes in operational and financial management and utilized experienced finance personnel from other business units and internal audit to assist with the closing of the Nordic financial statements for the second, third and fourth quarters of fiscal 2011. In addition, in the second quarter of fiscal 2011, the Company initiated an investigation into these and other accounting errors in the MSS segment. Initially, the investigation was conducted by Company personnel, but outside counsel and forensic accountants retained by such counsel later assisted in the Company’s investigations. Based upon the Company's investigation, which extended into the fourth quarter of fiscal 2011, review of the underlying documentation for certain transactions and balances, review of contract documentation and discussions with Nordic personnel, the Company attributes the majority of the $21 million of adjustments in the first quarter of fiscal 2011 and additional adjustments during the remainder of fiscal 2011 to accounting irregularities arising from suspected intentional misconduct by certain former employees in our Danish subsidiaries. See “Investigations” below.

The $16 million of out of period adjustments during the first quarter of fiscal 2011 for inappropriately capitalized costs are related to the following consolidated balance sheet line items:

Outsourcing contract costs ($9 million)
Prepaid expenses and other current assets ($3 million)
Property and equipment ($3 million)
Receivables ($1 million)

Other Adjustments: During the first quarter of fiscal 2011, the Company also identified out of period adjustments of $15 million that increased income from continuing operations before taxes, of which $13 million relates to other MSS operations. The adjustments attributable to the MSS segment are related to the following consolidated balance sheet line items:

Accounts receivable and other current assets ($5 million)
Deferred revenue ($5 million)
Other accrued expenses ($2 million)
Accounts payable ($1 million)

The remaining $2 million of out of period adjustments during the first quarter of fiscal 2011 consists of a reduction of other accrued expenses related to non-MSS segments from an adjustment to corporate general and administrative expense. The Company also identified $1 million of net out of period adjustments related to income tax benefits associated with complex tax positions.

The following table summarizes the effect on net income attributable to CSC common shareholders of the consolidated out of period adjustments recorded in the first quarter of fiscal 2011 (in millions):

(Amounts in millions)	Quarter Ended July 2, 2010
Operating costs inappropriately capitalized	$	16
Misapplication of US GAAP		3
Miscellaneous errors		2
Total Nordic adjustments		21
Other adjustments		(15	)
Effect on income from continuing operations before taxes		6
Income tax benefit		(4	)
Other income tax adjustments		(1	)
Effect on net income attributable to CSC common shareholders	$	1

The net impact of the out of period adjustments was immaterial to the consolidated results, financial position and cash flows for the first quarter of fiscal 2011. Consequently, the cumulative effect of these adjustments was recorded during the first quarter of fiscal 2011.

The select line items of the Consolidated Condensed Statement of Income for the first quarter ended July 2, 2010, impacted by the out of period adjustments (under the rollover method) are shown below:

(Amounts in millions, except per share amounts)	Reported as			Adjustments Increase/ (Decrease)			Amount Adjusted for Removal of Errors
Revenue	$	3,910		$	(6	)	$	3,904
Costs of services (excludes depreciation and amortization)		3,170			(13	)		3,157
Selling, general and administrative		243			2			245
Depreciation and amortization		256			(1	)		255
Interest expense		41			-			41
Other income		(3	)		-			(3	)
Income from continuing operations before taxes		211			6			217
Taxes on income		66			5			71
Income from continuing operations		145			1			146
Income from discontinued operations, net of taxes		3			-			3
Net income attributable to CSC common shareholders		143			1			144
EPS – Diluted
Continuing operations	$	0.89		$	0.01		$	0.90
Discontinued operations		0.02			-			0.02
Total		0.91			0.01			0.92

Investigations: As previously disclosed in CSC’s Form 10-K for year ended April 1, 2011, in fiscal 2011, the Company initiated an investigation into certain accounting errors in our MSS segment, primarily involving accounting irregularities in the Nordic region. Initially, the investigation was conducted by Company personnel, but outside Company counsel and forensic accountants retained by such counsel later assisted in the Company’s investigation. On January 28, 2011, the Company was notified by the Division of Enforcement of the SEC that it had commenced a formal civil investigation relating to these matters and other matters subsequently identified by the SEC, with which the Company is cooperating. On May 2, 2011, the Audit Committee of the Board of Directors commenced an independent investigation into the matters relating to the MSS segment and the Nordic region, matters identified by subpoenas issued by the SEC’s Division of Enforcement, and certain other accounting matters identified by the Audit Committee and retained independent counsel to represent CSC on behalf of, and under the exclusive direction of, the Audit committee in connection with such independent investigation. Independent counsel has retained forensic accountants to assist their work. Independent counsel also represents CSC on behalf of and under the exclusive direction of the Audit Committee in connection with the investigation by the SEC’s Division of Enforcement.

In addition, the SEC’s Division of Corporation Finance has issued comment letters to the Company requesting additional information regarding its previously disclosed adjustments in connection with the above-referenced accounting errors, the Company’s conclusions relating to materiality of such adjustments, and the Company’s analysis of the effectiveness of its disclosure controls and procedures and its controls over financial reporting. The Division of Corporation Finance’s comment letter process is ongoing, and the Company is continuing to cooperate with that process.

The investigations being conducted by the Division of Enforcement and the Audit Committee as well as the review of our financial disclosures by the Division of Corporation Finance are continuing and could identify other accounting errors. As a result, we have incurred and will continue to incur significant legal and accounting expenditures, and a significant amount of time of our senior management has been focused on these matters. We are unable to predict how long the Division of Enforcement’s and Audit Committee’s investigations will continue or whether, at the conclusion of its investigation, the SEC will seek to impose fines or take other actions against us. In addition, we are unable to predict the timing of the completion of the Division of Corporation Finance’s review of our financial disclosures or the outcome of such review. Publicity surrounding the foregoing or any enforcement action as a result of the SEC’s investigation, even if ultimately resolved favorably for us, could have an adverse impact on our reputation, business, financial condition or results of operations.