Is Changing Your Fiscal Year to a Calendar Year a Trick?

Do the missing months mask the true financial performance?

In a recent study entitled, “Orphans Deserve Attention:  Financial Reporting in the Missing Month When Corporations Change Fiscal Year,” the authors of the study found that out of the 1,786 public firms reviewed from 1993 to 2008, 45.4 percent shifted their fiscal year-end by intervals of up to two months and opined that these changes could “fly under the radar of investors and regulators”—or even change it by a longer duration that is not a multiple of three months.

Changing Your Fiscal Year

The July 26, 2013  article published in CFO Magazine, entitled “Companies Using ‘Missing Months’ to Play Accounting Tricks,” is worth examining since it suggests that changing from a fiscal year to a calendar year may mask the true performance of a company.

So, why change your fiscal year? The ordinary reason is to match your financial reporting with your natural business cycle.  Other reasons given for changing to a December year-end include complying with regulatory requirements.  This is the reason Goldman Sachs provided to justify a change to the calendar year in 2008, when it became a bank holding company. Other companies cited in the article raise questions or suspicions of other more sinister motives.  The implication of the article is to  opine that the “missing month” otherwise distorts the longer term financial comparatives.

While this is probably the case with regard to the comparisons, I don’t see the sinister motives.  I sit on a public company board and our fiscal year-end is July 31st, which coincides with our selling season.

The article suggests that the investor somehow is being hoodwinked into better comparisons without the missing month. Well, I don’t see it.  For those of us doing valuation work, we should be aware of these changes when we use public companies as comparable transactions.  So, we need to dig into those past numbers to be sure we understand the whole picture.

Stay tuned, let’s see if this tactic gains any more favor.

J. Allen Kosowsky, CPA/ABV, CVA, CFE, CFF, PFS, is Principal of J. Allen Kosowsky, CPA, a Shelton, CT business advisory and forensic accounting firm.  Mr. Kosowsky has more than four decades of experience.  He provides expert counsel in the fields of forensic accounting and business advisory services. He focuses his practice on providing investigative and litigation support to law firms as well as advising public and privatelyheld companies in a full range of tax, accounting and financial matters.  Allen’s core areas of expertise include forensic accounting and financial analysis, criminal advisory matters and economic damages.   J. Allen can be reached at jakcpa@snet.net.