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INDUSTRY WATCH: Quid Pro Quovadx
By David Rubinstein
 June 1, 2004 — The list of companies tarred by the brush of financial wrongdoing grows ever longer. Enron...Adelphia Communications…Tyco International...Computer Associates...Quovadx…
Quovadx? Yes, proving that greed and the pressure of hitting analyst and shareholder expectations are not the exclusive domain of Wall Street giants, the relatively small software company based in Englewood, Colo., joins a club that it should not have wanted to be a member of, to paraphrase Marx (the comedian, not the socialist).
The company has had to postpone its annual shareholders meeting, which was set for June 3, and it was unable to file its 10-Q report of earnings for the period ending March 31 due to the finding of irregularities. For fiscal year 2003, the company had revenues of US$71.6 million and showed a net loss of $14.6 million, after losing a whopping $104.1 million in 2002 on revenues of $63.7 million.
Quovadx recently purchased Rogue Wave, which sells C/C++ components and Web services libraries. Its original business, now called the Enterprise Application division, sells applications and services into the health-care, financial services and telecommunications markets.
The CEOs of the larger companies have become household names as they have fallen from their lofty perches—Kenneth Lay, Dennis Kozlowski, Sanjay Kumar. At Quovadx, where the dollar amounts involved are too small to be sexy enough for the general media, the name of the CEO under whose watch Quovadx reported revenue it never received will not be widely known.
Quovadx also stands apart from the others through the forthrightness of acting president and CEO Harvey A. Wagner, who took over the reins after the investigations began and issued a press release on May 13 that offered great insight into how these things go wrong.
While CA candidly acknowledged it had some accounting issues—after the mainstream press got wind of the story—the company offered no details into what it was looking for in its own internal investigations. These details came out only after charges against several of the company’s top officers were filed. Quovadx, on the other hand, appears to want to do the right thing. (Of course, the threat of sanctions and possible prosecution always makes companies want to do the right thing long after they’ve been doing the wrong things.)
In any case, the problems at Quovadx stem from a relationship it entered into with something called the Infotech Network Group, an outsourcing agent for companies based in India. According to the statements released by the company, it appears Quovadx agreed to pay about $2.5 million to Infotech under an outsourcing deal that Quovadx admits was merely an inducement to get Infotech to agree to purchase $14.1 million worth of software from Quovadx for resale to its clients.
Had the company done its due diligence, it would have known that much of the documentation Infotech presented was suspect at best. For starters, Infotech is not, nor has it ever been, a software distributor. Second, letters of credit it claimed to have with a bank in India have been shown to be nonexistent. Finally, letters Infotech provided to Quovadx—memoranda from state governments in India indicating they would buy software from Infotech—were not true commitments, and there are no assurances. Meanwhile Quovadx has never received payment from Infotech, and now does not expect to.
But Quovadx has paid Infotech almost $3 million under the terms of the outsourcing agreement. It now admits that some of those payments were made for the purpose of helping Infotech establish the letters of credit it would need to pay for the Quovadx software. And now the company says it is investigating other irregularities that don’t have anything to do with the Infotech affair.
Very messy business indeed. Unfortunately, this is merely another ugly episode. How many more of them are going on today that we just haven’t heard about yet? Plenty, I’m certain.
There are several roots to this problem. People are looking to the market to recoup the losses they suffered when the bubble burst as recession-ravaged interest rates remain low. Upper management remains overly greedy, believing they are “masters of the universe”—impervious to the laws and ethics that govern financial practices. It also stems from the fact that Wall Street’s punishments for missing estimates are unduly harsh.
Last, it has to do with the Quovadxes of the world wanting to become bigger fish in their ponds, feeding growth through acquisition rather than innovation, needing to drive revenue and market share to keep investment dollars rolling in, to fund larger acquisitions and keep pace with growing expectations on Wall Street.
This system has gotten very screwed up. Sadly, I’m sure the story of Quovadx isn’t the last of this genre to be told.
David Rubinstein is editor of SD Times. |
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