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Source link: http://archive.mises.org/9545/general-motors-is-not-a-going-concern/

General Motors is Not a Going Concern

March 5, 2009 by

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.

{ 11 comments }

Byzantine March 5, 2009 at 10:26 am

Of course it’s not, by any rational definition. And hasn’t been for some time even as it was paying dividends while floating new bonds. Try that with your S corp. and you’ll be in receivership, and probably in handcuffs as well.

I sometimes wonder if the 90+% institutional owners of GM stock were just selling them back and forth to each other to prevent delisting.

David Spellman March 5, 2009 at 11:01 am

GM is too a going concern! They are going in a hand basket but they really are not concerned!

AC March 5, 2009 at 12:40 pm

Full disclosure. I am a CPA in public practice, however, I audit very small companies, none of which are openly traded on any exchange.

An auditor is supposed to mention Going Concern in the audit opinion when there is substantial doubt the compnay will be in business in a year, not 2 years, 3 years, etc. So, if at 12/31/2008 it looks like the company has adequate cash flow/liquid assets, etc., to get it through to 1/1/2009. There is no going concern paragraph included in the audit opinion. Even if it is likely the company will be bankrupt by 6/30/2009.

An unqualified opinion on the financial statements doesn’t mean the company is in good health. It simply means in the auditor’s opinion the financial statements accurately portray the entity. Now those financial statements may accurately portray a company’s debt. One individual may read the financials and say the debt is too high. Another may read it and conclude that the debt is manageable. Those are each judgments that someone is making. The auditor is supposed to give an opinion as to whether the company’s financial statements are accurately portraying the company’s balance sheet and results from operations.

Now, I will agree that the auditing profession of late has taken some knocks. Some of which are rightly deserved. For example, failing to uncover material fraud. Personally though, I don’t feel it is the auditor’s responsibility to predict whether the entity will be a going concern. Although, under the auditing standards I am bound, I would not hesitate to issue that opinion on a client’s financial statements, if it were necessitated. However, it is better that the auditor opine as to whether the financial statements accurately portray the aspects of the company and let the financial statement readers decide the company’s going concern status.

Furthermore, gov’t intervention is mostly unpredictable and routinely has negative consequences to companies not feeding at the gov’t trough. Trying to predict and sort out those consequences is a mighty difficult job for anyone. For example, we also audit a few small non-profit companies. They could be seriously affected by any perceived or actual tax increases through less giving by individuals, especially wealthy individuals. If I am opining on the non-profit’s statements today, am I supposed to predict how much their donations are going to decrease over the next 12 months and if it will be great enough to cause them to shut down? There are variables, of which I cannot know the answer, nor any one else, to accurately make that statement.

The financial statements should accurately portray the company and the financial statement readers should make up their own minds. If those statements are inaccurate (intentional or not) and the auditor says they are fine, then that is a problem. Otherwise, auditors don’t have crystal balls. And quite a few auditors are in no way shape or form economists. And there are even less that know anything about the Austrian Business Cycle Theory.

SailDog March 5, 2009 at 8:10 pm

I am CA (Australian equivalent of a CPA) and further clarification of the going concern principle is appropriate.

The auditor must qualify his/her report if there is a “reasonable” probability that the company will not be a going concern within one year from the date of the audit report, not from the date of the accounts.

If there is sufficient reason to believe that the company will be a going concern, qualification is not necessary. In GM’s case, considering its sales trends, this could include hard (documented) evidence that the government will continue to support the company. It does NOT include vague statements in the media, even by the president.

AC March 5, 2009 at 10:41 pm

Hey thanks SailDog for clarifying the going concern dating point that it is from the date of the audit report. Looking back on what I wrote, I didn’t make it very clear.

In addition, I put from 12/31/2008 to 1/1/2009. Hah! That’s 1 day! In any case, that’s what I get for writing something in parts.

I would like to know some of your thoughts concerning whether auditors should be opining as to whether the company is a going concern. If the financial statements are accurately presented, the reader should be responsible to decide the going concern probabilities.

And finally, does this mean there is another public accountant that is aware of ABCT?

AC March 5, 2009 at 11:16 pm

Forgot to mention, that here in the US, there is some discussion regarding extending the 12 month criterion and making it “which is at least, but not limited to, 12 months from the end of the reporting period.” There has been a draft issued by FASB seeking comment.

Here is a link to Ernst & Young’s reply against it. Starting at p2, it gets good.
http://fasb.org/ocl/1650-100/53025.pdf

Mitch March 6, 2009 at 12:45 am

Sorry, but another CPA with an opinion: Ordinarily the financial statements should fairly represent the condition of the company at one point in time of a continuing process, with no definite ending date. The reason for the “going concern” qualification is that there is some doubt about the process continuing.

If a company is going to shut down, the company’s assets should not be valued according to their cost, or according to what they can produce, but according to what they would fetch in a sale. If the company was to continue, you would ordinarily assume that the company would keep and use the assets, not sell them. This is a big difference in what you would expect for cash flows.

AC March 6, 2009 at 9:06 am

Mitch,

Yes, when you have a going concern problem, the balance sheet should be valued at liquidation values. And this gets back to my original “complaint,” who determines the sale prices? Well, the company is supposed to and the auditor opines on them. When you have a volitile market, as we currently have, any liquidation values in my opinion are highly suspect. And until the liquidation actually occurs, the amounts could be materially too high or too low. At least when it’s presented at cost, you know what the amounts are.

In a going concern situation, I’d rather see the financial statements presented at historical cost and have some additional footnotes present the estimated liquidation values.

Karen A. DeCoster March 6, 2009 at 6:12 pm

AC, I am also a CPA and formerly an auditor in a “Big Ten” public accounting firm. All of those companies that went bust in the 2001-2002 period (from the CPA Journal study) could have, should have received an explanatory paragraph reflecting the auditor’s substantial doubt about the entity’s ability to continue as a going concern. Indeed, an unqualified opinion doesn’t = a clean bill of health from the auditors, but it is that paragraph which separates the wheat from the chaff in terms of auditor skepticism and independence. I can see your point about the auditor’s duty to opine on going concern (I am sympathetic to your point of view), but as long as the profession bears the standard, it’s an obligation to become independent enough to issue the explanatory paragraph.

Aside from intervention itself, the boom years – caused by the government’s fraudulent monetary policy – turn everything upside down and make people do insane, corrupt, and/or unethical things. In other words, booms not only distort prices and markets, they bring about debauchery on the part of individuals.

AC March 6, 2009 at 9:05 pm

Karen said:
“booms not only distort prices and markets, they bring about debauchery on the part of individuals.”

The more I think about this statement, the more I believe it to be correct.

edgar dominguez April 21, 2009 at 12:52 am

As long as financial auditors are not APPOINTED, they will NEVER be fully INDEPENDENT. Auditors want to have work and will have to give a good opinion in order to not be feared and be hired next year. I wish to appoint Chuck Norris to all those bandits! Take that recession 2009!

edgar_dominguez@hotmail.com

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