Companies Changing Fiscal Year End To Buy 404 Time

In an effort to buy more time under Section 404 of Sarbanes-Oxley, Chordiant Software, Inc. recently announced that its board had voted to change the end of its fiscal year from Dec. 31 to Sept. 30, beginning with FY 2004.

The move means that Chordiant will not have to comply with the Securities and Exchange Commission’s disclosure rules relating to internal control over financial reporting until Dec. 15, 2005—seven and one-half months later than compliance would have been mandated if the company stuck to the Dec. 31 year-end date; accelerated filers must comply with Section 404 for their first fiscal year ending on or after Nov. 15, 2004.

Chordiant, which is based in Cupertino, Calif., is not alone in tweaking its fiscal year as a way of stalling Section 404’s impact. A review of SEC filings indicates that at least three additional companies recently moved their fiscal year-end from Dec. 31 to Sept. 30.

One of those companies, GoRemote Internet Communications of Milpitas, Calif., informed the SEC in October 2004 that it was changing the end of its fiscal year to Sept. 30. In doing so, the company cited four reasons for the change, including improving its “ability to obtain and schedule external audit and audit-related support required to ensure ongoing compliance with regulatory requirements.”

Dorfman

Marc Dorfman, a former attorney with the SEC’s Division of Enforcement, says that making a change to the fiscal year as a way of extending SOX deadlines shows that “people are scrambling.” Dorfman, now partner at Foley & Lardner in Washington, adds that, “In this brave new world, everything’s possible. People are doing things that nobody thought you would do before.”

An SEC spokesman told Compliance Week that the Commission didn’t have much to say about companies opting to change their fiscal years. However, “if a company changes its fiscal year, we expect the company to disclose why,” he said.

Sending A Message

In the case of Chordiant Software, the company announced that it was changing its fiscal year end in a candid press release. “The effect of this change in Chordiant’s fiscal year end is the deferral of the date on which Chordiant must comply with the new disclosure rules over financial reporting,” the press release stated

The company went even further in its Form 8-K filing with the SEC:

“In the process of management's work to comply with Section 404 of SOX, management identified approximately 200 processes at Chordiant that must be documented and ultimately tested to determine whether a significant deficiency or material weakness in internal control over financial reporting exists. In December 2004, following a review by the audit committee of the progress in complying with Section 404, management concluded that it would not complete documenting Chordiant's internal control over financial reporting by Dec. 31, 2004, and that it was unlikely that the Company could complete its assessment of design and operating effectiveness of internal control over financial reporting by April 30, 2005, the extended time period allowed by the SEC to complete this assessment.”

The change to the fiscal year was not without repercussions. Within days of the announcement, analysts at JMP Securities downgraded Chordiant from “market outperform” to “market perform.” JMP Securities concluded that Chordiant’s delay in complying with section 404 suggested that the company was suffering from financial problems that “are more severe than expected.”

Despite the negative impact on Chordiant’s market rating, Dorfman told Compliance Week that a decision to change the fiscal year end date should not necessarily be interpreted as a bad sign. “It may send out a message that management is fairly intelligent and trying to adapt their situation to reality—everyone is trying to cope with things in their own way,” he said.

Appropriate Efforts, Or Filibuster?

In addition to Chordiant and GoRemote Internet Communications, two other accelerated filers companies recently informed the SEC that they were changing their fiscal year end from Dec. 31 to Sept. 30. Both companies have less than $75 million in annual revenues. The two were Activcard Corp., a Fremont, Calif.-based digital security firm, and Tripath Technology, a San Jose, Calif.-based company that markets digital amplifiers for consumer products.

Activcard spokeswoman Robin Schultz told Compliance Week that the company’s decision to change fiscal years was suggested by its new independent auditing firm, BDO Seidman. Activcard had been working with Deloitte & Touche, but was dropped because Deloitte “had an overload of clients and they were releasing a lot of their smaller firms,” Schultz said.

Clarke Seniff, a spokesman for Tripath, said that the company had been considering changing fiscal years for some time because “calendar year end is just a terrible time,” but that the burden of SOX “was the thing that made us look at it seriously.”

Franco

Joseph Franco, who spent eight years at the SEC's Office of the General Counsel, said that changing a fiscal year is an understandable result of the pressures companies feel to meet their SOX deadlines. “I imagine some people feel that they had to [change the fiscal year],” said Franco, now a professor at Suffolk University Law School in Boston.

The Commission is trying to be sensitive to the “real practical problems” that companies are having, Franco said. “They are reasonable people who are willing to make the rules work, but, at the same time, they are wary of people who have no interest in the project at all. There’s a tension between trying to make reasonable accommodations for companies [that are making appropriate efforts] and [dealing with] companies that want to filibuster.”