Investigations and Out of Period Adjustments

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

As previously disclosed, the Company initiated an investigation into out of period adjustments resulting from certain accounting errors in our former Managed Services Sector (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 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, 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 former 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 retained forensic accountants to assist with 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 was 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 the U.K. National Health Service (NHS). In the course of the Audit Committee's expanded investigation, accounting errors and irregularities were identified. As a result, certain personnel have been reprimanded, suspended, terminated and/or have resigned. The Audit Committee determined in August 2012 that its independent investigation was complete. The Audit Committee instructed its independent counsel to cooperate with the SEC's Division of Enforcement by completing production of documents and providing any further information requested by the SEC's Division of Enforcement.

In addition to the matters noted above, the SEC's Division of Enforcement is continuing its investigation involving its concerns with certain of the Company's prior disclosure and accounting determinations with respect to the Company's contract with the NHS and the possible impact of such matters on the Company's financial statements for years prior to the Company's current fiscal year. The Company and the Audit Committee and its independent counsel are continuing to respond to SEC questions and to cooperate with the SEC's Division of Enforcement in its investigation of prior disclosures of the Company's contract with the NHS. 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 the 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 SEC's Division of Corporation Finance's comment letter process is ongoing, and the Company is continuing to cooperate with that process.

The investigation being conducted by the SEC's Division of Enforcement and 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, CSC has incurred and may continue to incur significant legal and accounting expenditures. The Company is unable to predict how long the SEC's Division of Enforcement's investigation will continue or whether, at the conclusion of its investigation, the SEC will seek to impose fines or take other actions against the Company. In addition, the Company is unable to predict the timing of the completion of the SEC's Division of Corporation Finance's review of its 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 CSC, could have an adverse impact on the Company's reputation, business, financial condition, results of operations or cash flows.

Out of Period Adjustments Financial Impact Summary

The rollover impact on income (loss) from continuing operations before taxes of the recorded out of period adjustments in the first three months of fiscal 2014, fiscal 2013 and fiscal 2012 is attributable to the following prior fiscal years:



	Increase/(Decrease)
(Amounts in millions)	Fiscal 2012 Adjustments			Fiscal 2013 Adjustments			Fiscal 2014 First Quarter Adjustments			Total Adjustments
Fiscal 2014	$	—		$	—		$	(9	)	$	(9	)
Fiscal 2013	—			6			7			13
Fiscal 2012	79			7			(3		)	83
Fiscal 2011	(29		)	(22		)	2			(49		)
Prior fiscal years (unaudited)	(50		)	9			3			(38		)

See Note 13 for a summary of the effect of the pre-tax out of period adjustments on the Company's segment results for the three months ended June 28, 2013 and June 29, 2012, respectively.

Fiscal 2014 Adjustments

During the first quarter of fiscal 2014, the Company identified and recorded net adjustments increasing income from continuing operations, before taxes by $9 million that should have been recorded in prior fiscal years. This net impact on income from continuing operations before taxes comprised of the following:


•	net adjustments decreasing income from continuing operations before taxes by $13 million resulting primarily from revenues and costs in its GBS segment;


•	net adjustments increasing income from continuing operations before taxes by $8 million resulting from the correction of payroll expenses within its GBS segment; and


•	net adjustments increasing income from continuing operations before taxes by $14 million resulting primarily from adjustments identified by the Company late in the fiscal 2013 closing process.

Adjustments recorded during the first quarter of fiscal 2014 that should have been recorded in prior fiscal years decreased income from continuing operations by $2 million. The difference is attributable to the tax effect of the adjustments described above, and $2 million of tax expense related to net adjustments that should have been recorded in prior periods.

The impact of out of period adjustments recorded during the first quarter of fiscal 2014 on select line items of the Consolidated Condensed Statements of Operations for the quarter ended June 28, 2013, using the rollover method, is shown below:



	Quarter Ended June 28, 2013
(Amounts in millions, except per-share amounts)	As Reported			Adjustments Increase/ (Decrease)			Amount Adjusted for Removal of Errors
Revenue	$	3,260		$	19		$	3,279
Costs of services (excludes depreciation and amortization and restructuring costs)	2,466			26			2,492
Selling, general and administrative	292			—			292
Depreciation and amortization	255			—			255
Restructuring costs	7			2			9
Interest expense	39			—			39
Other (income) expense	(1		)	—			(1		)
Income from continuing operations before taxes	206			(9		)	197
Taxes on income	65			(11		)	54
Income from continuing operations	141			2			143
Income from discontinued operations, net of taxes	18			—			18
Income attributable to CSC common shareholders	156			2			158
EPS – Diluted
Continuing operations	$	0.91		$	0.01		$	0.92
Discontinued operations	0.11			—			0.11
Total	$	1.02		$	0.01		$	1.03

The out of period adjustments impacting income from continuing operations before taxes recorded by the Company in the three months ended June 28, 2013 are related to the following consolidated balance sheet line items:


•	Accounts receivable ($1 million decrease);


•	Prepaid expenses and other current assets ($2 million increase);


•	Other assets ($4 million increase);


•	Accrued payroll and related costs ($8 million decrease )


•	Deferred revenue ($18 million increase); and


•	Accrued expenses and other current liabilities ($14 million decrease).

The Company has determined that the impact of the consolidated out of period adjustments recorded during the first quarter of fiscal 2014 is immaterial to the consolidated results, financial position and cash flows for the first quarter of fiscal 2014 and prior years. Consequently, the cumulative effect of these adjustments was recorded during the first quarter of fiscal 2014.

Fiscal 2013 Adjustments

During the first quarter of fiscal 2013, the Company recorded net adjustments primarily in its NPS and GBS segments reducing income from continuing operations before taxes by $1 million that should have been recorded in prior fiscal years. The out of period adjustments recorded in the first quarter of fiscal 2013 consisted of $17 million of charges reducing income from continuing operations before taxes and $16 million of adjustments increasing income from continuing operations before taxes. These net adjustments increased income from continuing operations by $5 million. The difference is attributable to the tax effect of the adjustments described above, and a $2 million tax benefit recorded in the first quarter of fiscal 2013 but related to prior periods.

During subsequent periods, the Company recorded out of period adjustments primarily in its GBS and GIS segments that should have been recorded in the first quarter of fiscal 2013. Had such adjustments been recorded in the first quarter of fiscal 2013, income from continuing operations before taxes would have decreased by $2 million, of which $4 million relates to adjustments identified during the first quarter of fiscal 2014. Had such adjustments been recorded in the first quarter of fiscal 2013, there would have been no net effect on income from continuing operations.

The impact of out of period adjustments recorded during fiscal 2013 and the first quarter of fiscal 2014 on select line items of the Consolidated Condensed Statements of Operations for the quarter ended June 29, 2012, using the rollover method, is shown below:



	Quarter Ended June 29, 2012
(Amounts in millions, except per-share amounts)	As Reported		Adjustments Increase/ (Decrease)			Amount Adjusted for Removal of Errors
Revenue	$	3,633	$	6		$	3,639
Costs of services (excludes depreciation and amortization and restructuring costs)	2,977		1			2,978
Selling, general and administrative	281		3			284
Depreciation and amortization	262		(2		)	260
Restructuring costs	27		5			32
Interest expense	44		—			44
Other (income) expense	12		—			12
Income from continuing operations before taxes	35		(1		)	34
Taxes on income	18		4			22
Income from continuing operations	17		(5		)	12
Loss from discontinued operations, net of taxes	25		—			25
Net income attributable to CSC common shareholders	40		(5		)	35
EPS – Diluted
Continuing operations	$	0.10	$	(0.03	)	$	0.07
Discontinued operations	0.16		—			0.16
Total	$	0.26	$	(0.03	)	$	0.23

The out of period adjustments impacting income from continuing operations before taxes recorded by the Company in the three months ended June 29, 2012 are related to the following consolidated balance sheet line items:


•	Accounts receivable ($2 million increase);


•	Prepaid expenses and other current assets ($2 million decrease);


•	Property and equipment ($3 million decrease);


•	Accrued payroll and related costs ($1 million decrease)


•	Deferred revenue ($7 million increase); and


•	Accrued expenses and other current liabilities ($10 million decrease).

The Company determined that the impact of the consolidated out of period adjustments recorded in the first quarter of fiscal 2013 was immaterial to the consolidated results, financial position and cash flows for the first quarter of fiscal 2013 and prior years. Consequently, the cumulative effect of these adjustments was recorded during the first quarter of fiscal 2013.