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By Steven Vaughan-Nichols  |  Posted 2004-07-13 Print this article Print

The market, however, doesnt like this change one bit. Red Hat dropped in price by $4.33—more than 20 percent—on the NASDAQ by 1 p.m. EDT. The shorts and longs battled it out on the frantic Red Hat financial message boards at Yahoo. Some shorts asked, "Why didnt management say anything during the June conference call?" Others suggested that Red Hats previous chief financial officer resigned two weeks before the last earnings call because he knew the "books were cooked."

The longs, on the other hand, said simply: "The amount reported by the new method will be the same, just the date of recording the sale will be different. There is no objective evidence (that I can see) of a problem at Red Hat. This sell off is panic driven. Eventually panics end."

Szuliks response to short questions has simply been that just because PWC made a recommendation didnt mean that the companys management was going to change its accounting methods. "Red Hat had used methods that we believed were correct for the last five years. After analyzing PWCs recommendations, we elected to make the change."

While Red Hat executives during the press conference were vague about exactly why the firm was changing its accounting methods, Dan Kusnetzky, IDC vice president for system software research, speculated that it was because this new method is a better fit for Red Hats software subscription-based business model.

"Their accounting was more suited for product-oriented software revenues and costs, while their business model is more like professional services. With Sarbanes Oxley, organizations like Red Hat, but not Red Hat alone, must be more careful about how they present their revenues. My suspicion is that they thought what they were doing was acceptable accounting practices, but that it would be better to use a more granular, day-to-day approach. In this new regulatory environment, companies are having to make significant changes in how they manage, hold and make information available," said Kusnetzky.

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Steven J. Vaughan-Nichols is editor at large for Ziff Davis Enterprise. Prior to becoming a technology journalist, Vaughan-Nichols worked at NASA and the Department of Defense on numerous major technological projects. Since then, he's focused on covering the technology and business issues that make a real difference to the people in the industry.

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