An industry that has been respected for its spotless balance sheets and earnings statements is now finding itself under the microscope, with the nation's two largest suppliers reporting accounting errors that led to inflated earnings.
Delphi Corp., Visteon Corp. – the two largest suppliers – and Collins & Aikman Corp. have acknowledged improper bookkeeping practices.
"Don't think people got worse," Tim Leuliette, chairman and CEO of Metaldyne Corp. told the Detroit News. “The rules just got better,” he said, referring to the Sarbanes-Oxley Act.
The newspaper suggested that if the situation at Delphi is any indication, things may get worse before they get better.
Delphi, based in Troy, improperly accounted for certain past transactions, leading to an overstatement of cash flow in 2000 of $200 million and a $61 million overstatement of 2001 pretax income.
The disclosure led to the resignation of chief financial officer Alan Dawes and a board audit of accounting practices. Two more executives have resigned and another officer was demoted. The Securities and Exchange Commission has served subpoenas to a number of current and former executives.
Visteon announced that $31 million in improperly booked expenses were identified for the first quarter of 2005, the Detroit News reported. The company acknowledged other errors related to accounting for certain retiree health care benefits that caused it to restate earnings from 2002.
Alan Reinstein, professor of accounting at Wayne State University, told the Detroit News that the method suppliers use to book accruals, or expenses and income that occur over time, raises questions. If a piece of equipment is expected to depreciate over 10 years, and a company spreads that expense over 20 years, for example, it saves money. Booking sales months before an item is delivered is another way that companies can boost financial results and balance sheets, Reinstein said.
"Every manufacturer in trouble pulls those games all the time. It's classic.," he said. But the SEC, which is pressured by shareholders, 401(k) investors and pensioners, is cracking down on the practice.