Justice Joins Investigation of Network Associates

Accounting probe expands of security software company.
Network Associates on Wednesday said the Justice Department has joined an investigation by securities regulators into potential accounting problems at the company.

As a result, the software company, which specializes in security and anti-virus products, said it will restate its financial statements for 1998, 1999 and 2000. This is the second time that Network Associates is restating its results.

The company already under investigation by the Securities and Exchange Commission, now with the disclosure that the Justice Department has joined the probe, suggests the possibility that criminal charges could be levied against individuals, or the company in the future.

At issue is whether top executives at Network Associates logged sales of the company's software products prior to reaching customers. There is the possibility that criminal charges could be filed against the company, but many of the executives who could be responsible for those crimes have already left the company.

On December 26, 2000, Network Associates top management all resigned. Former CEO Bill Larson, President Peter Watkins and Chief Financial Officer Prabhat Goyal were the three top Network Associates executives who resigned, and the company pledged it would adhere to strict accounting standards. But last year the company took $28 million in net income off its books for the three years in question, following an internal audit that revealed revenues had been overstated and expenses were understated.

As the result of restating financial results for a second time, Network Associates will delay its 2002 annual 10-K report, which is due next Monday. The report could be delayed several weeks.

One of the key accounting changes that Network Associates says it has made is to count the financial results of the sale of a product when a distributor actually sells to a customer, rather than booking sales when products are delivered to distributors. This was the company's accounting policy in the past, which got it into trouble.

Network Associates has three major product groups, led by McAfee Security and its anti-virus and security software products. The company's Sniffer Technologies is involved in network availability and system security. Network Associates' Magic Solutions provides companies with service management solutions.

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