Computer Sciences Corp. facing accounting debacle: CEO steps down as company plans to restate earnings since 2000.

This much can be said with certainty about the departure of Computer Sciences Corp. Chief Executive Van Honeycutt.

The 32-year veteran employee left suddenly amid an accounting debacle that will cost the company upwards of $400 million--the kind of fiasco that could cost any CEO a job, especially after years of mediocre results.

So even after he spent 11 years at the top post of the El Segundo information technology services company, Honeycutt's departure was hardy causing tears on Wall Street--whether or not he was forced out.

"We view this as a positive for CSC," said Rod Bourgeois, an analyst with Bernstein Research, in a research note last week. "On the flip side, we still think CSC's turnaround will require substantial ... investment and time."

Computer Services disclosed in a May 30 filing with the Securities and Exchange Commission that it would restate its earnings from 2000 to 2006 after finding "significant errors" in its tax liability accounting--resulting in a charge of $300 million to $400 million.

The news was particularly embarrassing for CSC, whose biggest customer is the U.S. government. The company has a long-term contract to modernize the IRS information technology systems.

And the filing came only a week after CSC said it was delaying its quarterly report for the second consecutive quarter and that it had appointed a new chief executive--Chief Operating Officer Michael Laphen--to immediately take over the company.

Moreover in February, the company announced that its options backdating practices were going to cost $60 million, though it concluded executives did not intentionally backdate grants to maximize returns.

Changing of the guard

Hundreds of companies have found irregularities with their stock option practices over the last two years as it became clear that some were intentionally backdating option grants to maximize executive gains.

However, the problems at CSC came after years of sluggish growth, as well as a failed attempt to sell itself.

The company offers a wide variety of information technology services, from systems analysis to data center management, in industries ranging from aerospace, to automotive, to telecommunications.

During Honeycutt's tenure as chief executive, which began in 1996, CSC has underperformed the S&P 500 and has seen its return on capital investments stall at 7.9 percent, a rather low rate for a company that has focused on acquisitions to fuel growth.

Over the past year, its shares have dropped 2 percent, a disappointing return for investors while the markets have set records. Moreover, a year ago CSC was the subject of takeover bids from the likes of Lockheed Martin Corp. and Hewlett-Packard Co., prompting the firm to hire Goldman Sachs & Co. as its financial advisor and announce a restructuring program to slim down.

However, private equity firm Blackstone Group and Hewlett Packard were unable to reach an agreement to purchase the company, which resisted a breakup. At the time, it was reported CSC would fetch about $60 per share, an 8 percent premium on Thursday's closing price of $55.40.

Since then CSC has taken steps to trim expenses, and a company spokesman said that new Chief Executive Laphen was the architect of the restructuring effort.

"The appointment of Mike was part of a long-term strategic growth plan. He was instrumental in formulating the plan and was a natural fit to step in as CEO," said spokesman Mike Dickerson, who referred any questions about Honeycutt's departure to regulatory filings.

(The 62-year-old Honeycutt received a handsome retirement package, though nothing approaching the $100 million plus payouts that have drawn widespread criticism. He is to get more than $11 million, including a $500,000 consulting contract, health and life insurance and security services through 2009, in addition to office space and a personal assistant.)

Lapben is stepping in during a critical period for CSC. In April, the company announced it had acquired Covansys Corp. a global consulting and technology services company based in Farmington Hills, Mich.

The $1.3 billion acquisition could spur growth, but Bourgeois of Bernstein research said he is concerned that this deal may not provide the return CSC was hoping for.

"Acquisitions in the past have tended to precede big issues at IT services companies," Bourgeois said in his research note. "It will be difficult for CSC to generate a positive return on the Covansys acquisition itself."

For now, though, CSC is far from being in any serious trouble, with four of 14 analysts tracked by Bloomberg News rating the company a buy and only two a sell. (Bourgeois is among the two sells, the result of a downgrade last week.) One reason: the company retains a horde of cash, with $726 million on its balance sheet as of the end of the last calendar year. Moreover, it is expecting to generate some $850 million in free cash flow this fiscal year.