Warranty issues.

I have issue with a manufacturing company .Huge dividend before company then went bust.

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Who would look at possible malfeasement ?The Administrator or DTI/Companies House ?My beef is a warranty issue,which has now gone south.Where would the warranty accrual be included in creditors ?There is an extensive accounts note on warranties and how they are calculated.Would the auditors check the accuracy of the provision ?It would make a huge difference to profit/reserves and dividend calc.I know that last summer ,when the 2017 accounts/audit would be transacted,that no new products were made and only warranty work was undertaken.

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By paul.benny
01st Aug 2019 13:20

Presumably you are a customer with a warranty claim that the business is no longer able to meet = and you’re looking for someone to take a fall. I’m sorry to disappoint you, but that’s not going to happen.

As Finance Director of a manufacturing business, I would determine warranty provision by looking at the historic rate of warranty claims and the average cost of settling a claim – whether by repair, refund or replacement. Depending on the size of the number, I might choose to make a more detailed calculation – for example by product or product family.

I would expect the auditors to review and validate my calculation and the inputs. The larger the amount, the greater the degree of scrutiny. Ultimately, waranty provisions are a matter of judgement as no-one can foresee the actual level of claims.

Most of the time, the warranty provision is fairly small – because it’s bad business to incur large warranty claims. But occasionally, costs are high – eg Boeing 737MAX

If a manufacturer fails with large un-met warranty claims, that’s unlikely to have been the primary cause of failure (even Boeing won’t fail as a result of the 737MAX).

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By Michael Davies
01st Aug 2019 13:42

Thanks that’s interesting.Shouldnt the Auditor become just as interested if the warranty position is too small .The National Council for this industry put product failure at one in four models with serious warranty issues;resulting in and around 25 hours of work to correct per product.Maybe I am hoping for too much for the Audit Manager to look out of the window when on site,or to have some knowledge of the industry.Failing that a little bit of research would have set the alarms bells ringing ?

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Replying to Michael Davies:
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By paul.benny
01st Aug 2019 14:08

The industry rate of warranty claims has only limited relevance. I would concern myself principally with the claims rate and costs in my own business – which might be better or worse than the industry average. That said I were claiming a 5% rate when industry rates were much higher, I would expect the auditors to challenge me to explain why my rates were so different. But in most industries, warranty rates are not readily available.

You don’t specify what industry your figures refer to - they do rather sound like housebuilding rather than manufacturing as per the OP.

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By LostinSuspense
01st Aug 2019 14:06

Without being able to read the note on warranty, it's quite hard to determine what it says or indeed how old your product item is?

You might have a product selling for £5,000 whereby 85% of all products need a warranty fix but it costs £3 and the issue is only likely to happen in the first 2 days of ownership and then you might get a failure rate of 0.01% after that over 10 years.

If the company went bust, (I am not a liquidator or expert in this field), it might be that the liquidator placed those with warranty requirements at the bottom of the pile to receive any refund, just above the shareholders as other creditors such as Banks or HMRC were making a far bigger noise.

Without further information, this is only guesswork on my behalf.

The auditors may have been happy with the information given if/when they queried for the audit work. I don't think any claim against the auditors for a warranty fail would be successful, or I suspect this would be one of the harder areas to argue a failure by the auditors in their care of duty.

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By bernard michael
01st Aug 2019 14:06

Answering your question as put. The liquidator/administrator is the person to talk to

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By thevaliant
01st Aug 2019 14:06

I hate to say it, but:

1. This is a legal issue - nowt to do with accounting.
2. You've NO chance of hoping the auditors will have any liability at all.
3. Whilst it *might* be worth asking such people as the DTI (or whatever they're called this week) to investigate, you personally will see no redress.

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Replying to thevaliant:
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By Michael Davies
01st Aug 2019 14:48

As I said I am not an auditor,but I am surprised at your comment item one.
Unless you can have faith in the audit;what’s the point of it ?

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Replying to Michael Davies:
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By paul.benny
01st Aug 2019 15:05

Have you read the audit opinion on the company?

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Replying to Michael Davies:
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By thevaliant
01st Aug 2019 15:56

An audit is not designed for you. Read an audit report, fully.

You see that paragraph near the end? That says that only the shareholders can rely on the report. Well, are you?

If you're not, you have no possible come back against the auditors. And the auditors know this.

Far from me to suggest, but sometimes I hear of auditors telling management there may be problems in the accounts on the QT, but publically issuing statements of clean bill of health. As the auditor knows no member of the public can rely on them, they can say what they like in public.

No one, but no one, should EVER rely on the audit report. Ever.

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Replying to thevaliant:
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By LostinSuspense
05th Aug 2019 16:49

Unless I have misunderstood the question, I thought it was a challenge of the figure set aside for warranties anyway.

It might be that the explanation given to the auditors fully explained why they had decided to put the provision in the accounts at the level they had done, hence the auditors were completely satisfied with the figure shown in the accounts.

To the Op. it might be a waste of time and money, but are you sure the issue with your item is not a separate component breaking that was sourced from another party and comes under their warranty? The issue being unravelling the state of affairs and it may prove as you were not the direct customer, you are ineligible to make a claim.

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By Michael Davies
01st Aug 2019 14:42

Thanks.
No I just put the subject out for discussion.
There have been numerous instances of audit failures over the years.Some avoidable,some not.
My claim is just not worth pursuit and I do not expect any measure of payment.I do however feel sorry for the large number of employees who have been shown the door and the dealers sitting on stock which would be difficult to shift.Did the employees and dealers recognise that there was a huge problem coming down the line ,well before the Administrators were called in ?

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Replying to Michael Davies:
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By paul.benny
01st Aug 2019 15:01

Quote:
Did the employees and dealers recognise that there was a huge problem coming down the line ,well before the Administrators were called in ?

Almost certainly.

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Replying to Michael Davies:
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By paul.benny
01st Aug 2019 15:09

Quote:
There have been numerous instances of audit failures over the years.

A bad audit doesn't cause a company to fail.

PwC were rightly excoriated for the quality of their work on BHS. But BHS had been a dead man walking for years before it went down.

Grant Thornton may have done a poor job on Patisserie Valerie (I haven't seen a report on that) but it was the alleged fraud that took PV down.

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By Montrose
01st Aug 2019 18:56

Other end of the spectrum. Plc subsidiary pays insurance premium to offshore captive insurance in respect of future warranty claims. Business ceases. When warranty period expires, entire insurance company reserves flow back to plc tax free!

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