Investigations and Out of Period Adjustments

Summary of Audit Committee and SEC Investigations Related to the Out of Period Adjustments

Background

As previously disclosed in fiscal 2011, the Company initiated an investigation into out of period adjustments resulting from 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 SEC’s Division of Enforcement that it had commenced a formal civil investigation relating to these matters, which investigation has subsequently been expanded to other matters subsequently identified by the SEC, including matters specified in subpoenas issued to the Company from time to time by the SEC’s Division of Enforcement as well as matters under investigation by the Audit Committee of the Board of Directors, as further described below. The Company is cooperating in the SEC’s investigation.

On May 2, 2011, the Audit Committee 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.

The Audit Committee’s investigation has been expanded to encompass (i) the Company’s operations in Australia, (ii) certain aspects of the Company’s accounting practices within its Americas Outsourcing operation, and (iii) certain of the Company’s accounting practices that involve the percentage of completion accounting method, including the Company’s contract with NHS. In the course of the Audit Committee's expanded investigation, accounting errors and irregularities have been identified. As a result, certain personnel have been reprimanded, suspended, terminated and/or resigned. All of these investigative activities are ongoing.

Any out of period adjustments identified, including items that self corrected within a fiscal year, by the Company to date are hereinafter identified in this Note 2.

The Company believes the SEC also has expanded its investigation into the foregoing areas as well as into certain related disclosure matters. The SEC's investigative activities are ongoing. In addition, the SEC's Division of Corporation Finance has issued comment letters to the Company requesting, among other things, 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 internal control 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 SEC's Division of Enforcement and the Audit Committee as well as the review of our financial disclosures by the SEC's Division of Corporation Finance are continuing and could identify other accounting errors, irregularities or other areas of review. 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 that otherwise would have been focused on the growth of the Company. 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, results of operations or cash flows.

During fiscal 2011, the Company recorded $52 million of pre-tax adjustments that should have been recorded in prior fiscal years. The total out of period adjustments recorded in fiscal 2011 were comprised of $92 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, with $36 million of the $40 million within MSS.

The Company recorded $79 million of out of period adjustments in fiscal 2012, which included $13 million of charges in the Nordic region, $23 million of charges in the Company's operations in Australia, and $25 million of charges originating from the NHS contract in the Company's BSS segment. Additionally, $16 million and $2 million of charges were recorded in the NPS segment and other operations of the Company, respectively. The fiscal 2012 out of period adjustments primarily related to the Company’s MSS and BSS segments, with $37 million and $26 million within MSS and BSS, respectively.

Certain additional items have been identified but not yet recorded related to the NHS contract that could have an effect on the amount and the allocation of the out of period adjustments for fiscal 2012 and prior fiscal years. Management does not believe that the effect of these additional items is material to the Company's financial statements. However, the investigation into these additional items is ongoing, and the amount could change and the allocation across years is likely to change.

The rollover impact on income (loss) from continuing operations before taxes of the recorded out of period adjustments is attributable to the following prior fiscal years:



	Increase/(Decrease)
(Amounts in millions)	Fiscal 2011 Adjustments			Fiscal 2012 Adjustments			Total Adjustments
Fiscal 2012	$	—		$	79		$	79
Fiscal 2011	52			(29		)	23
Fiscal 2010	(48		)	(9		)	(57		)
Fiscal 2009 (unaudited)	(3		)	(27		)	(30		)
Prior fiscal years (unaudited)	(1		)	(14		)	(15		)

Nordic Region

As noted above, during fiscal 2011, the Company commenced an investigation into accounting irregularities in the Nordic Region. Based upon the Company's investigation, 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 $92 million pre-tax adjustments recorded in the Nordic region in fiscal 2011 to accounting irregularities arising from suspected intentional misconduct by certain former employees in our Danish subsidiaries. The Company attributes the $13 million in pre-tax adjustments recorded in the Nordic region in fiscal 2012 to miscellaneous errors and not to any accounting irregularities or intentional misconduct other than a $1 million operating lease adjustment noted in the first quarter of fiscal 2012 which was a refinement of an error previously corrected and reported in fiscal 2011.

Australia

In the course of the Australia investigation initiated in fiscal 2012, accounting errors and irregularities have been identified. As a result, certain personnel in Australia have been reprimanded, suspended, terminated and/or resigned. Based upon the information developed to date, and the Company’s assessment of the same, the Company has identified and recorded during fiscal 2012, $23 million of adjustments reducing income from continuing operations before taxes relating to its operations in Australia. Such adjustments have been categorized as either intentional accounting irregularities (“intentional irregularities”) or other accounting errors (“Other Errors”). Other accounting errors include both unintentional errors and errors for which the categorization is unclear. The categorizations were provided to the Company through the independent investigation. The impact of the adjustments on income (loss) from continuing operations before taxes is attributable to the following prior fiscal years:



	Increase/(Decrease)
(Amounts in millions)	FY08 & Prior (unaudited)			FY09 (unaudited)			FY10			FY11			Total
Intentional irregularities	$	10		$	(7	)	$	(4	)	$	1		$	—
Other Errors	(7		)	(16		)	3			(3		)	(23		)
	$	3		$	(23	)	$	(1	)	$	(2	)	$	(23	)

Americas Outsourcing

In the course of the independent investigation of Americas Outsourcing accounting practices, accounting conventions used by Americas Outsourcing relating to intraperiod cost allocations were determined to be unintentional accounting errors. The errors did not have an impact on a fiscal year basis. The Company also determined that other operating units employed similar practices and made necessary corrections. The Company has determined that the impact of these corrections was not material on any fiscal year.

In addition to the adjustments discussed above, a $1 million out of period adjustment related to an understatement of a fiscal 2011 management incentive compensation expense disclosed in the first quarter of fiscal 2012 has been determined by the Company to be a $3 million out of period adjustment as a result of the investigation. This item included multiple components, a portion of which the Company previously considered not to be related to out of period errors. Based on the results of the independent investigation, the Company now attributes these adjustments to Other Errors, which include both unintentional errors and errors for which the categorization is unclear.

NHS

In fiscal 2012, $25 million of out of period adjustments reducing income from continuing operations related to the Company's NHS contract were identified and recorded. During the course of the investigation in fiscal 2012 of the percentage of completion accounting method used on the Company's NHS contract, certain accounting errors were identified related to costs incurred under the contract, which resulted in errors in the recognition of income from continuing operations that would have reduced by approximately $24 million the $1.5 billion write-off recorded by the Company in the third quarter of fiscal 2012. Although the Company has concluded that these errors do not appear to have any impact on amounts charged to the NHS, the errors have impacted the operating income recognized on the NHS contract. The exclusion of certain costs incurred under the contract caused the estimated margin at completion, which determines the operating income that is booked when revenue milestones are achieved, to be overstated. Although the Company has concluded that there is no cumulative impact as a result of the $1.5 billion charge relating to the NHS contract recorded as of December 30, 2011, operating income from fiscal year 2007 through and including fiscal 2011 has been overstated by a total of approximately $24 million and, therefore, the charge taken by the Company as of December 30, 2011 was overstated by approximately the same amount.

Certain CSC finance employees based in the United Kingdom were aware prior to fiscal 2012 of the aforementioned errors, but those employees failed to appropriately correct the errors. Therefore, the Company has classified these errors as intentional. Such categorization was provided to the Company through the independent investigation. As a result, certain personnel have been suspended and additional disciplinary actions are being considered.

In addition to the NHS accounting errors discussed above, the Company identified and recorded a $1 million adjustment in fiscal 2012 to write off contract acquisition costs that were inappropriately capitalized in fiscal year 2008. The Company has classified this error as unintentional.

The investigation also identified a transaction which was treated as a cost item but should have been treated as a reduction in revenue. This has resulted in an overstatement of revenue and an overstatement of operating costs from fiscal 2008 to fiscal 2012 of $6 million.

The impact on income (loss) from continuing operations before taxes of the $25 million of out of period adjustments identified in fiscal 2012 related to the Company's NHS contract is attributable to the following prior fiscal years:



(Amounts in millions)	Increase/(Decrease)
Fiscal 2011	$	(8	)
Fiscal 2010	(4		)
Fiscal 2009 (unaudited)	(3		)
Prior fiscal years (unaudited)	(10		)

Fiscal 2012 Financial Impact Summary

As noted above, during fiscal 2012, the Company recorded various pre-tax adjustments reducing income from continuing operations before taxes by $79 million ($63 million, net of tax), that should have been recorded in prior fiscal years. The out of period adjustments recorded in fiscal 2012 were comprised principally of $13 million of charges in the Nordic region, $23 million of charges in the Company's operations in Australia, $25 million of charges originating from the NHS contract in the Company's BSS segment and $16 million in the NPS segment. The NPS adjustments were identified by the Company and were primarily related to percentage of completion accounting adjustments.

Certain additional items have been identified but not yet recorded related to the NHS contract that could have an effect on the amount and the allocation of the out of period adjustments for fiscal 2012 and prior years. Management does not believe that the effect of these additional items is material to the Company's financial statements. However, the investigation into these additional items is ongoing, and the amount could change and the allocation across years is likely to change.

The following table summarizes the cumulative effect on net income (loss) attributable to CSC common shareholders of the consolidated out of period adjustments recorded during fiscal 2012. Certain adjustments reflected below only impacted quarters (unaudited) within the annual period.



	Quarter Ended
(Amounts in millions)	July 1, 2011			September 30, 2011			December 30, 2011			March 30, 2012			Total
Nordics adjustments	$	4		$	6		$	2		$	1		$	13
Australia adjustments	—			21			2			—			23
NHS adjustments	—			(1		)	28			(2		)	25
NPS adjustments	3			—			(4		)	17			16
Other adjustments	2			(7		)	6			1			2
Effect on income from continuing operations before taxes	9			19			34			17			79
Taxes on income	(2		)	(4		)	(2		)	(8		)	(16		)
Other income tax adjustments	1			14			(10		)	(5		)	—
Effect on net income attributable to CSC common shareholders	$	8		$	29		$	22		$	4		$	63

The pre-tax out of period adjustments recorded by the Company during fiscal 2012 are related to the following consolidated balance sheet line items as of March 30, 2012:


•	Property and equipment ($32 million decrease)


•	Prepaid expenses and other current assets ($4 million decrease)


•	Accounts receivable ($24 million decrease)


•	Accrued expenses and other current liabilities ($19 million increase)

The following table summarizes the cumulative effect on fiscal 2012 of the net income (loss) attributable to CSC common shareholders of the consolidated out of period adjustments recorded in fiscal 2012. Certain adjustments reflected below only impacted quarters (unaudited) within the annual period.



	Quarter Ended
(Amounts in millions)	July 1, 2011			September 30, 2011			December 30, 2011			March 30, 2012			Total
Operating costs inappropriately capitalized	$	1		$	—		$	—		$	—		$	1
Misapplication of US GAAP	1			(1		)	2			(1		)	1
Miscellaneous errors	2			7			—			2			11
Total Nordic adjustments	4			6			2			1			13
Operating costs inappropriately capitalized	—			11			—			—			11
Misapplication of US GAAP	—			8			—			1			9
Miscellaneous errors	—			2			2			(1		)	3
Total Australia adjustments	—			21			2			—			23
NHS adjustments	—			(1		)	28			(2		)	25
NPS adjustments	3			—			(4		)	17			16
Other adjustments	2			(7		)	6			1			2
Effect on income from continuing operations before taxes	9			19			34			17			79
Taxes on income	(2		)	(4		)	(2		)	(8		)	(16		)
Other income tax adjustments	1			14			(10		)	(5		)	—
Effect on net income attributable to CSC common shareholders	$	8		$	29		$	22		$	4		$	63

The select line items of the Consolidated Statement of Operations for the twelve months ended March 30, 2012, impacted by the consolidated out of period adjustments under the rollover method are shown below.



	Twelve Months Ended March 30, 2012
(Amounts in millions, except per share amounts)	As Reported			Adjustments Increase/ (Decrease)			Amount Adjusted for Removal of Errors
Revenue	$	15,877		$	27		$	15,904
Costs of services (excludes depreciation and amortization, contract charge, settlement charge, and restructuring costs)	13,406			(32		)	13,374
Cost of services – specified contract charge (excludes amount charged to revenue of $204)	1,281			(18		)	1,263
Selling, general and administrative	1,141			1			1,142
Depreciation and amortization	1,152			(2		)	1,150
Interest expense	176			(3		)	173
Other (income) expense	(6		)	2			(4		)
(Loss) income from continuing operations before taxes	(4,347		)	79			(4,268		)
Taxes on income	(121		)	16			(105		)
(Loss) income from continuing operations	(4,226		)	63			(4,163		)
Income from discontinued operations, net of taxes	1			—			1
Net (loss) income attributable to CSC common shareholders	(4,242		)	63			(4,179		)
EPS – Diluted
Continuing operations	$	(27.38	)	$	0.41		$	(26.97	)
Discontinued operations	0.01			—			0.01
Total	$	(27.37	)	$	0.41		$	(26.96	)

The Company has determined that the impact of the consolidated Australia, Nordic, NHS and other out of period adjustments recorded in fiscal 2012 is immaterial to the consolidated results, financial position and cash flows for fiscal 2012 and prior years. Consequently, the cumulative effect of these adjustments was recorded during fiscal 2012.

Effect of Adjustments on Prior Year Financial Statements

As noted above, during fiscal 2011, the Company recorded $52 million of pre-tax adjustments that should have been recorded in prior fiscal years. The total out of period adjustments recorded in fiscal 2011 were comprised of $92 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, with $36 million of the $40 million within MSS. Based upon the Company's investigation, 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 out of period adjustments identified and recorded in the Nordic region in fiscal 2011 to accounting irregularities arising from suspected intentional misconduct by certain former employees in our Danish subsidiaries. These accounting irregularities included the inappropriate capitalization of operating costs, the misapplication of US GAAP and miscellaneous errors.

The following table summarizes the cumulative effect on fiscal 2011 of the net income attributable to CSC common shareholders of the consolidated out of period adjustments recorded during fiscal 2011 and 2012. Certain adjustments reflected below only impacted quarters (unaudited) within the annual period.



	Quarter Ended
(Amounts in millions)	July 2, 2010			October 1, 2010			December 31, 2010			April 1, 2011			Total
Operating costs inappropriately capitalized	$	15		$	38		$	8		$	6		$	67
Misapplication of US GAAP	4			3			6			(1		)	12
Miscellaneous errors	1			(1		)	9			(2		)	7
Total Nordic adjustments	20			40			23			3			86
Operating costs inappropriately capitalized	—			(1		)	(1		)	—			(2		)
Misapplication of US GAAP	—			1			3			(1		)	3
Miscellaneous errors	(4		)	5			(2		)	(3		)	(4		)
Total Australia adjustments	(4		)	5			—			(4		)	(3		)
NHS adjustments	—			(1		)	(2		)	(5		)	(8		)
NPS adjustments	4			2			(10		)	(7		)	(11		)
Other adjustments	(8		)	(6		)	(16		)	(11		)	(41		)
Effect on income from continuing operations before taxes	12			40			(5		)	(24		)	23
Taxes on income	2			—			8			9			19
Other income tax adjustments	(1		)	(13		)	(6		)	17			(3		)
Effect on net income attributable to CSC common shareholders	$	13		$	27		$	(3	)	$	2		$	39

The $65 million of out of period adjustments for inappropriately capitalized costs are related to the following consolidated balance sheet line items:


•	Outsourcing contract costs ($12 million decrease)


•	Prepaid expenses and other current assets ($35 million decrease)


•	Accounts receivable and other current assets ($4 million decrease)


•	Property and equipment ($13 million decrease)


•	Accrued expenses ($1 million increase)

The select line items of the Consolidated Statement of Operations for fiscal 2011 and fiscal 2010 impacted by the out of period adjustments, including those identified in fiscal 2012 under the rollover method are shown below.



	Twelve Months Ended April 1, 2011
(Amounts in millions, except per share amounts)	As Reported			Adjustments Increase/ (Decrease)			Amount Adjusted for Removal of Errors
Revenue	$	16,042		$	18		$	16,060
Costs of services (excludes depreciation and amortization)	12,925			(8		)	12,917
Selling, general and administrative	965			—			965
Depreciation and amortization	1,073			3			1,076
Interest expense	168			—			168
Other (income) expense	(20		)	—			(20		)
Income from continuing operations before taxes	968			23			991
Taxes on income	243			(16		)	227
Income from continuing operations	725			39			764
Income from discontinued operations, net of taxes	34			—			34
Net income attributable to CSC common shareholders	740			39			779
EPS – Diluted
Continuing operations	$	4.51		$	0.25		$	4.76
Discontinued operations	0.22			—			0.22
Total	$	4.73		$	0.25		$	4.98



	Twelve Months Ended April 2, 2010
(Amounts in millions, except per share amounts)	As Reported			Adjustments Increase/ (Decrease)			Amount Adjusted for Removal of Errors
Revenue	$	15,921		$	(26	)	$	15,895
Costs of services (excludes depreciation and amortization)	12,618			32			12,650
Selling, general and administrative	981			(2		)	979
Depreciation and amortization	1,095			(1		)	1,094
Interest expense	252			2			254
Other (income) expense	(20		)	—			(20		)
Income from continuing operations before taxes	1,022			(57		)	965
Taxes on income	192			(2		)	190
Income from continuing operations	830			(55		)	775
Income from discontinued operations, net of taxes	4			—			4
Net income attributable to CSC common shareholders	817			(55		)	762
EPS – Diluted
Continuing operations	$	5.27		$	(0.36	)	$	4.91
Discontinued operations	0.01			—			0.01
Total	$	5.28		$	(0.36	)	$	4.92

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