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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis.

Jan 31

Written by: Jack Ciesielski
1/31/2005 9:04 AM 

Last week, Eastman Kodak was in the news: it was the first major company to disclose that it expects an adverse opinion from its auditor (PricewaterhouseCoopers) on its internal controls. This morning, Visteon joined ranks with it - right down to the same auditor.

Visteon released an 8-K detailing its expected restatement of 2002, 2003, and the first three quarters of 2004. The restatement is due to a potpourri of changes: a switch in inventory accounting from LIFO to FIFO; an adjustment to deferred taxes for the effects of currency fluctuations on retained earnings of foreign subsidiaries, triggered by plans to repatriate earnings; deferred tax valuation allowance adjustments; and a reversal of reductions in postretirement life and health care costs.

It's that last one that's the most interesting. It seems that Visteon had modified the terms of its OPEB plans in the US and the changes in benefits had not been properly communicated to the employees under Statement 106 - and that means they couldn't go ahead and account for the reductions in benefit expense that they took in 2002, 2003 and the first nine months of 2004. The restatement will reverse those $88 million of cumulative pre-tax cost decrements. (There's a deferred tax effect to the reversal as well, perhaps as much as $54 million. It's not completely clear from the 8-K if some of that amount relates to the inventory methodology switch.)

The communications snafu cost Visteon a shot at getting off to a good start on its Section 404 reporting: management concludes that the lapse of communication constitutes a material weakness in internal controls, and they will not be able to conclude that said internal controls are effective as of December 21, 2004 (the only day that matters.) The firm's management expects to receive an adverse opinion on its internal controls from auditor PwC - just like Eastman Kodak.

If Sam DiPiazza is right, they'll have plenty of company. Soon.