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 its 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 disclosures 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 and accounting determinations with respect to 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 the Company's 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 may continue to incur significant legal and accounting expenditures. As the Company previously disclosed, certain of its non-U.S. employees and certain of its former employees, including certain former executives in the United States, have received Wells notices from the SEC’s Division of Enforcement in connection with its ongoing investigation of the Company. The Company received a Wells notice from the SEC’s Division of Enforcement on December 11, 2013. A Wells notice is not a formal allegation or a finding of wrongdoing; it is a preliminary determination by the SEC Enforcement Staff to recommend that the Commission file a civil enforcement action or administrative proceeding against the recipient. Under SEC procedures, a recipient of a Wells notice has an opportunity to respond in the form of a Wells submission that seeks to persuade the Commission that such an action should not be brought. The Company has been availing itself of the Wells process by making a Wells submission to explain its views concerning such matters, which are aided by the Audit Committee's independent investigation and certain expert opinions of outside professionals. The Company made such a submission on January 14, 2014 and a supplemental submission on April 9, 2014. The Company, through outside counsel, has been in continuing discussions with the SEC Enforcement Staff concerning a potential resolution of the staff’s investigation involving the Company. However, to date those discussions have not resulted in a resolution. The Company is unable to estimate with confidence or certainty how long the SEC process will last or its ultimate outcome, including whether the Company will reach a settlement with the SEC and, if so, the amount of any related monetary fine and other possible remedies. 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 the pre-tax income (loss) from continuing operations of the recorded out of period adjustments in the first quarter of fiscal 2015, fiscal 2014 and fiscal 2013 is attributable to the following prior fiscal years:



	Increase/(Decrease)
(Amounts in millions)	Fiscal 2013 Adjustments			Fiscal 2014 Adjustments			First Quarter Fiscal 2015 Adjustments			Total Adjustments
Fiscal 2015	$	—		$	—		$	(12	)	$	(12	)
Fiscal 2014	—			(2		)	13			11
Fiscal 2013	6			4			(1		)	9
Prior fiscal years (unaudited)	(6		)	(2		)	—			(8		)

See Note 15 for a summary of the effect of the pre-tax out of period adjustments on the Company's segment results for the quarters ended July 4, 2014 and June 28, 2013, respectively.

Fiscal 2015 Adjustments

During the first quarter of fiscal 2015, the Company identified and recorded net adjustments increasing pre-tax income from continuing operations by $12 million that should have been recorded in prior fiscal years. The net impact of these adjustments on income from continuing operations before taxes for the first quarter ended fiscal 2015 primarily included lower fiscal 2014 variable compensation partially offset by certain adjustments related to cost of services that were identified late in the 2014 close process and, therefore, were not included in the Company's fiscal 2014 Consolidated Financial Statements.

Adjustments recorded during the first quarter of fiscal 2015 that should have been recorded in prior fiscal years, increased net income attributable to CSC common shareholders by $2 million.

The impact of out of period adjustments recorded during fiscal 2015 on select line items of the unaudited Consolidated Condensed Statements of Operations for the quarter ended July 4, 2014, using the rollover method, is shown below:



	Quarter Ended July 4, 2014
(Amounts in millions, except per-share amounts)	As Reported			Adjustments Increase/ (Decrease)			Amount Adjusted for Removal of Errors
Revenue	$	3,237		$	7		$	3,244
Costs of services (excludes depreciation and amortization and restructuring costs)	2,364			20			2,384
Selling, general and administrative	344			—			344
Depreciation and amortization	272			(1		)	271
Restructuring costs	10			—			10
Interest expense	39			—			39
Interest income	(5		)	—			(5		)
Other (income) expense	(1		)	—			(1		)
Income from continuing operations before taxes	214			(12		)	202
Taxes on income	55			(6		)	49
Income from continuing operations	159			(6		)	153
Loss from discontinued operations, net of taxes	(8		)	4			(4		)
Net income attributable to CSC common stockholders	146			(2		)	144
EPS – Diluted
Continuing operations	$	1.03		$	(0.04	)	$	0.99
Discontinued operations	(0.05		)	0.03			(0.02		)
Total	$	0.98		$	(0.01	)	$	0.97

The out of period adjustments impacting income from continuing operations before taxes recorded by the Company in the quarter ended July 4, 2014 are related to the following line items of the unaudited Consolidated Balance Sheet:



(Amounts in million)	Increase/(Decrease)	July 4, 2014
Accounts receivable	Increase	$	5
Software	Decrease	1
Other assets	Decrease	3
Accrued expenses and other current liabilities	Decrease	13
Deferred revenue	Increase	2

The Company has determined that the impact of the consolidated out of period adjustments recorded in the first quarter of fiscal 2015 is immaterial to the consolidated results, financial position and cash flows for the current quarter and prior periods. Consequently, the cumulative effect of these adjustments was recorded during fiscal 2015.

Fiscal 2014 Adjustments

During the first quarter of fiscal 2014, the Company identified and recorded net pre-tax 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 is 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 between the pre-tax and after tax impact 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.

During periods subsequent to June 28, 2013, the Company recorded out of period adjustments with a net pre-tax impact to income from continuing operations of $9 million, primarily in Corporate, that should have been recorded in the first quarter of fiscal 2014. Had such adjustments been recorded in the appropriate period, income from continuing operations before taxes for the first quarter of fiscal 2014 would have been lower by $9 million.

The impact of out of period adjustments recorded during fiscal 2014, and the first quarter of fiscal 2015, on select line items of the unaudited 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	$	3,254		$	12		$	3,266
Costs of services (excludes depreciation and amortization and restructuring costs)	2,437			24			2,461
Selling, general and administrative	288			4			292
Depreciation and amortization	254			—			254
Restructuring costs	7			2			9
Interest expense	39			—			39
Interest income	(4		)	—			(4		)
Other (income) expense	(1		)	—			(1		)
Income from continuing operations before taxes	234			(18		)	216
Taxes on income	73			(15		)	58
Income from continuing operations	161			(3		)	158
Loss from discontinued operations, net of taxes	16			(1		)	15
Net income attributable to CSC common stockholders	174			(4		)	170
EPS – Diluted
Continuing operations	$	1.03		$	(0.02	)	$	1.01
Discontinued operations	0.11			(0.01		)	0.10
Total	$	1.14		$	(0.03	)	$	1.11

The out of period adjustments impacting income from continuing operations before taxes recorded by the Company in the quarter ended June 28, 2013 are related to the following unaudited Consolidated Balance Sheet line items:



(Amounts in million)	Increase/(Decrease)	June 28, 2013
Accounts receivable	Decrease	$	2
Prepaid expenses and other current assets	Increase	10
Software	Increase	4
Other assets	Increase	5
Accrued payroll and related costs	Decrease	6
Accrued expenses and other current liabilities	Decrease	16
Deferred Revenue	Increase	21

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