Auditing

Ceridian Warns of ‘Material Weakness’

The company also announced that it will change its accounting treatment for its interest-rate and fuel-price derivative securities.
Stephen TaubFebruary 2, 2005

Ceridian Corp., a human-resources outsourcing company, warned that its accounting firm will not be able to issue a positive opinion on Ceridian’s internal controls in the company’s 2004 annual report because it may have identical a “material weakness” during the Sarbanes-Oxley Section 404 compliance process.

The company stressed, however, that it does expect that its accounting firm, KPMG LLP, will issue a clean, unqualified opinion of Ceridian’s financial statements.

The company added that although efforts are under way, its material weaknesses will not be considered remediated until new internal controls have been operational long enough to be tested to the satisfaction of Ceridian and KPMG.

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Ceridian stated that the material weaknesses include deficiencies in its internally developed software capitalization guidelines, the commencement of amortization of its capitalized software development costs, its month-end close process, its cost and expense accrual process, its entity-level control process, and policies and practices relating to revenue recognition and the classification of costs and expenses in the company’s consolidated financial statements.

The company also announced that it will change its accounting treatment for its interest-rate and fuel-price derivative securities. Ceridian noted that interest-rate hedges have been highly successful components of its risk management strategy since 1992. A fuel-price hedging strategy was introduced in 2003 to mitigate the company’s exposure to price variability in its Comdata operation.

As a result of the change, Ceridian increased its total pretax earnings from 2001 through 2004 by about $28.1 million.

In addition to the change in accounting for derivative securities, the company said that it adjusted expenses for the years 2001 through 2004 and changed revenue recognition, which reduced revenue and earnings before income taxes for 2003 and the first three quarters of 2004.