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Earlier today, Goodyear Tire announced their third batch of accounting problems in the last six months - unfortunately, not the best way to build up investor confidence in the turnaround abilities of any management group. Past problems have been traced to a flummoxed computerized accounting system (worth about $85 million of overstated earnings across five years) and problems with actions taken by European managers. According to Reuters, the new issues have to do with an under-accrual of workers’ compensation claims at one of its U.S. plants, discovered as part of its year end closing procedures. It’s worth about another $16 million of overstated earnings across five years. I often preach that analysts and investors would do well to consider the “critical accounting policies” addressed in the Management’s Discussion & Analysis section of the annual report. Warning: I’m about to do it again. Because, in glorious black and white, Goodyear Tire listed in its 2002 10-K as one of its critical accounting policies: Workers’ Compensation. Goodyear had recorded liabilities totaling $136.7 million and $124.5 million for anticipated costs related to workers’ compensation at December 31, 2002 and 2001, respectively. The costs include an estimate of expected settlements on pending claims, defense costs and a provision for claims incurred but not reported. These estimates are based on Goodyear’s assessment of potential liability using an analysis of available information with respect to pending claims, historical experience, and current cost trends. The amount of Goodyear’s ultimate liability in respect of these matters may differ from these estimates. Yes, you say, but who cares about required weasel words in a government filing? Goodyear Tire? It’s a ghost of the company it was when it was a Dow Jones Industrials company, in a miserable industry that shows no growth. And it’s only down a couple percentage points from before the announcement. My point isn’t that these disclosures lead to great insights that get you out of a stock in heroic order. (In fact, we don’t even know where the stock price is going to go after this story has been around for a while. The news just broke an hour or so ago, near as I can tell.) The point is that these disclosures represent genuine information that should beget questions. Maybe you don’t like Goodyear’s management. But - management told us a year ago workers’ compensation claims represent an area of accounting risk because they’re chock full of estimates. A year later, they can say "told you so." (Strikes me as kind of unfair to criticize managers if you ignore what they’re telling you.) Still, the 2002 disclosures are awfully thin on details. (What was the recorded expense? What reversals occurred? Cash requirements?) If a policy is critical enough to disclose to investors, companies shouldn’t just tease them with info-bait on a string and snap it out of their mouths. One has to wonder if Goodyear might have found the problems sooner if they had bothered to craft a fuller disclosure for investors. It might have saved some face.
At any rate, the take-away: it’s annual report time. Read the critical accounting policy disclosures and ask questions.
–Jack Ciesielski
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