gerebgraus
Member
But all this should still leave room for the company to play a little with the reserve in case they are willing to make the numbers in one quarter a bit worse in exchange to make the next quarter better?PwC audits both Tesla and Ford and in this year's 10K audit opinion letter for both companies, they included wording on how they audit the warranty accrual. They acutally bring in audit experts with specialized skills in this area to audit the accrual. Here is the wording from the Tesla audit opinion letter (I've bolded sections that I felt were important):
....These procedures included testing the effectiveness of controls relating to management’s estimate of the automotive warranty reserve, including controls over management’s estimate of the nature, frequency and costs of future claims as well as the completeness and accuracy of actual claims incurred to date. These procedures also included, among others, testing management’s process for determining the automotive warranty reserve. This included evaluating the appropriateness of the model applied and the reasonableness of significant assumptions, including the nature and frequency of future claims and the related costs to repair or replace items under warranty. Evaluating the assumptions related to the nature and frequency of future claims and the related costs to repair or replace items under warranty involved evaluating whether the assumptions used were reasonable considering current and past performance, including a lookback analysis comparing prior period forecasted claims to actual claims incurred. These procedures also included developing an independent estimate of a portion of the warranty accrual, comparing the independent estimate to management’s estimate to evaluate the reasonableness of the estimate, and testing the completeness and accuracy of historical vehicle claims. Procedures were performed to test the reliability, completeness, and relevance of management’s data related to the historical claims processed and that such claims were appropriately used by management in the estimation of future claims. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of aspects of management’s model for estimating the nature and frequency of future claims, and testing management’s warranty reserve for a portion of future warranty claims.
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Tesla introduces regularly new tech. that initially have higher defect rate, but they have the best processes to reduce the defects dramatically and fast. (e.g. OTA is not one sided with updates, but it monitors the car and reports back, so Tesla has a much better ability to measure the quality of parts and find what is needed for improvement, and they can trust their service centers much better about reporting back warranty issues.)