General Motors Corp.’s auditors have raised “substantial doubt” about the troubled automaker’s ability to continue operations, and the company said it may have to seek bankruptcy protection if it can’t execute a huge restructuring plan.
The automaker revealed the concerns Thursday in an annual report filed with the U.S. Securities and Exchange Commission.
“The corporation’s recurring losses from operations, stockholders’ deficit, and inability to generate sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern,” auditors for the accounting firm Deloitte & Touche LLP wrote in the report.
In my August 2008 article on General Motors, written with Eric Englund, I noted that “going concern” would soon become a buzzword, and it has. Financial statement users should be able to rely on auditors to provide early warning signals of a company’s potential failure because the auditors are in the best position to determine this, and also, because they are required to do so according to the standards of their profession. However, there does exist an expectations gap – the public wrongly assumes that auditors should do far more than they are required to do, or have the ability to do.
Going concern is not simply a solvency test at the balance sheet date. The other considerations for GM would be the occurrence of certain events since the year end – namely a bailout from the government and the need for an additional bailout in order to be sustained. It has become painfully clear that GM does not have the cash flow to sustain its operations and it will not be able to meet its liabilities as they become due. An entity that needs a bailout from taxpayers, authorized by government, is not a going concern.The CPA Journal, in a slightly dated article (2004), states that “twelve of the 20 largest bankruptcy filings in U.S. history took place in 2001 and 2002. In total, these 12 companies brought $381 billion of assets into bankruptcy. …All 12 companies received an unqualified opinion on their most recent financial statements filed prior to the bankruptcy filing. None of the audit opinions included an explanatory paragraph reflecting the auditor’s substantial doubt about the entity’s ability to continue as a going concern.” In addition, the article states, “A survey of the audit reports for 202 of the 257 publicly traded bankrupt companies that filed for bankruptcy in 2001 revealed that only 96 (48%) of these companies contained a separate paragraph indicating the auditor’s doubt about the company’s ability to continue as a going concern.” That is a massive failure on the part of the auditing profession.
Consider the case of sub-prime lender New Century Financial Corp. This company was not only reaping the rewards of the Fed’s fraudulent boom, but it was doing so via its own fraudulent practices. Yet the auditors, KMPG, turned their heads for two consecutive years on the illicit practices on the part of the company’s management.
This profession has lost the ability to be skeptical and independent. It has taken a major financial meltdown and a rush to bankruptcy on the part of many well-known companies in order for the audit profession to reawaken to the fact that “going concern” is of crucial concern.