• GM’s Audit Flubs: A Video For The Street.com

    By • Nov 20th, 2010 • Category: Pure Content, You Can Quote Me On That

    While I was in New York last week for the FEI Current Financial Reporting Issues conference, I taped a spot for The Street.com on the November 18th GM IPO.  I was against the GM bailout. I’m embarrassed by how the administration has manipulated this “resurrection” of GM.

    I also wrote two pieces for Forbes on this subject, here and here.  GM is an accident waiting to happen again because they haven’t learned the lessons of their past.  They made this IPO happen by polishing the balance sheet and making optimistic projections of revenues.  There are too many ongoing weaknesses in both their strategy and their financial infrastructure to pull this off over the long term.

    Who else can IPO with several years of adverse opinions on their internal controls over financial reporting and no audited financial statements?

    I’m making a prediction:  GM will have another big restatement before the 2012 election.

    Disclosure:  I drive a black 1999 Audi A6 Quattro.

    My video was a contrarian respite given all the hype on the IPO and first listing day.  A link to it ended up on the front page of The Drudge Report under all the positive GM stories.  My friend Andrew says that Drudge is the most influential assignment desk in the world.  When Drudge highlights stories,  major media feels pressure to tell them, too.  I should be getting calls from Fox News any day now.

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    10 Responses »

    1. Agree with you on the GM bailout – its a disgrace. And I’m someone who thinks that the financial bailout, as unfortunate as it is, had to happen. But I don’t see a restatement here, actually see no chance. There’s multiple big four firms involved, and if they know one thing to do, it’s to make sure nothing bad happens when the stakes are the highest and the spotlight is on them. You can’t compare this to anything else (pick restatement du jour), this is a huge, high profile company in bankruptcy going throigh an IPO. Having been through an IPO in the past six months in a big four firm, I know this will be handled in the most conservative way possible.

    2. Francine:

      I am really sorry but I am having a hard time following your line of thought with regard the prospects of the new GM succeeding. What makes you really believe that history is bound to soon repeat itself in the case of GM? I mean, this is a company that went through a prepackaged bankruptcy that allowed it -like it or not- to clean its balance sheet. Pension liabilities are still a concern but the new management seems to be committed to making sure that GM’s pension plan is fully funded (http://www.thestreet.com/story/10903887/1/gm-to-pay-down-11-billion-of-debt.html?cm_ven=GOOGLENhttp://www.detnews.com/article/20101119/AUTO01/11190361/1148/Roadblocks-remain-on-GM%E2%80%99s-path-to-recovery ). Talking about new management, as far as the C-Suite is concerned both the CFO (former MSFT CFO) and CEO (formerly at Carlyle) are not auto industry insiders. With regard the new amendment as it pertains to deferred tax assets for companies that went through bankruptcy proceedings, GM is not the only entity benefiting from it…let’s make that clear.

      In my opinion, what American tax payers should really be concerned with is the fact that GM took the necessary steps to put itself in the best position to succeed over the long run. GM rid itself of its non performing brands. GM was able to hire away the two top heads of Hyundai America’s marketing team. In the past five years or so, there hasn’t been a automobile company in the U.S. auto market that has had a better marketing strategy than Hyundai. In the first half of this year and for the first time ever, GM sold more cars in China than in the US. China is or is about to be the biggest automobile market of the world. Guess who is the number one import car maker in China? GM! GM is going to import Holden Caprice to the US and sell it only to law enforcement agencies as a police cruiser. Holden is the Australian and performance oriented subsidiary of GM…. the then highly acclaimed Pontiac G8 was actually a rebadged Holden Commodore . I believe it was a mistake for GM to be selling the Chevy Impala as both a police cruiser and a consumer car….it was just not a smart thing to do because it eroded the appeal that the Impala had on car buyers…. Couple of years before GM had to go through bankruptcy, it understood the importance of leveraging its global auto manufacturing infrastructure. Thus sedans, compacts, and subcompacts cars sold in the US are being designed in Europe (Opel) or in Asia (GM-SAIC) or in Australia (Holden) because all those units have been successful at designing highly acclaimed vehicles for their respective markets.

      Anyway, your argument is based on what you “know” about the old GM. Apparently, you believe that GM has not undergone any significant restructuring with regard to its financial reporting policies and its operations. The question I am going to ask you is the following: what do you know about the new GM that makes you believe that GM is doomed to repeat its numerous and infamous past missteps?

    3. @Narcisse

      GM has had a material weakness in internal controls over financial reporting for several years. The weakness, which would have been fatal to any other company after all this time, still exist now, at the time of the IPO. A company tells you they have not had and do not have internal controls over their financial reporting process. Why would you trust any financial information that comes out of them? Deloitte has been complicit in the manipulation of financial results in the past. Why would Deloitte challenge GM on anything in the future? The only reason GM has positive shareholders equity is because of goodwill, a function of the accounting they were allowed in bankruptcy. If their results improve, that asset goes away. Can improvement in results – real true, accurate, valid improvement – outweigh the reduction in this asset in order to keep shareholder’s equity positive? GM may have a commitment to funding the pension liability but can they afford to?

      Why would you invest in a company that has a history of manipulating financial results if all they offer you are unaudited financial statements, presided over by the same audit firm that allowed the manipulation in the past?

    4. Francine:

      I believe I gave you all the reasons why somebody should seriously consider GM’s stock as an excellent investment opportunity. Granted, NEW GM management acknowledged that the company has material weakness in internal controls over its financial reporting. However, NEW GM also said it is working diligently to address the internal control issues it inherited. Effective internal controls over financial reporting is a noble goal that every company should tirelessly strive to achieve and maintain, however that is not what is going to bring car buyers into GM dealerships. I can’t speak to Deloitte contractual relationships with GM. You seem to omit a very important aspect regarding the goodwill issue. Goodwill could go down as liabilities go down as well. Last time I checked, paying off debt has the effect of lowering the liabilities section of the balance sheet, right? This balance sheet issue just as the weaknesses in internal controls are just temporary. If GM is making money selling cars, I don’t see any reason that will prevent it from fully funding its pensions obligations and substantially paying of its debt. It all comes down to profitably selling cars and I outlined all the reasons why GM is going to do well manufacturing and selling automobiles.

    5. @Narcisse

      My column was directly speaking to GM as an investment. I am no expert on the cars as mechanically superior or superior in design to other cars. Good products do not always matter if a company is poorly run. I drive an Audi.

      Internal controls over financial reporting are not just a worthy goal. They are a necessity. A company that lives without them for so many years is saying that integrity and validity of external finanicial reporting is not a priority. They are laughing in the face of investors. How their auditor can continue to give then a non qualified opinion on financial statements they say can not be trusted is beyond me and why the SEC allows this is a mystery.

      For a more detailed discussion of the goodwill I suggest you look at Tom Selling or Jon Weil’s writeup. It discusses how this particular goodwill was booked and the impact of future profits on it. Both are linked in my original story at Forbes.

    6. Francine –

      Internal controls = competent people. I was there for the implementation of 404 through where we are today. Controls don’t nearly mean as much as people think. You know what three quarters of all MWs are? Mistakes. Someone missed something. There isn’t this big design gap in the “internal controls” of the acompany – ie, it wasn’t that the issue wasn’t reviewed. The person who was responsible for a review wasn’t technically competent enough to make the correct decision. That’s the majority of most control issues in companies.

      And to answer your question on how an auditor can give a non qualified opinion, it’s pretty easy. They test the you know what out of the balances that are subject to the MW. You don’t need controls to issue a clean opinion on the FS. You just have to beat up the balances.

    7. @Natty

      I hear you. But GM’s has had material weaknesses for not having enough competent accounting professionals and knowledge of GAAP and SEC reporting issues. They make the same mistakes over and over again.

      From the 10Q 4/7/2010

      The material weakness relates to controls that were not effective over the period-end financial reporting process. This resulted in a significant number and magnitude of out-of-period adjustments to Old GM’s consolidated financial statements. Specifically, controls have not been effective to ensure that accounting estimates and other adjustments were appropriately reviewed, analyzed and monitored by competent accounting staff on a timely basis. Additionally, some of the adjustments that were recorded by Old GM related to account reconciliations not being performed effectively. Such a material weakness in the period-end financial reporting process has a pervasive effect on the reliability of financial reporting and could result in a company not being able to meet its regulatory filing deadlines. If not remediated, it is reasonably possible that the Company’s consolidated financial statements could contain a material misstatement or that it could miss a filing deadline in the future.
      In the current quarter, actions continued to be taken to improve internal control over financial reporting by advancing initiatives to address our material weakness including:
      Evaluating and improving trial balance and account ownership;
      Improving adherence to account reconciliation policies and procedures;
      Documenting roles and responsibilities for close processes;
      Implementing new consolidation software;
      Updating and implementing consolidation procedures;
      Improving management reporting and analysis procedures;
      Implementing a new issue management process;
      Implementing a standardized account reconciliation quality assurance program;

    8. Francine:

      First of all, Happy Thanksgiving to you and Natty!

      In your response to my most recent comment, you stated: “My column was directly speaking to GM as an investment. I am no expert on the cars as mechanically superior or superior in design to other cars. Good products do not always matter if a company is poorly run.” How are you able to provide an opinion with regard to the suitability of investing in a company’s equity if you can’t speak to that company’s overall competitiveness vis a vis its peers from the same industry? Good products that people want to buy and are buying always matter. A company can have the most robust internal control procedures in the world, if it is unable to sustainably and profitably sell its products or services, that company is doomed to fail. GM did not fail because of material weakness in its internal control over financial reporting, it failed because of the cumulative effect of a string of poor business strategies. Furthermore, you are making a seriously shaky extrapolation when you equate a company with material weakness in its internal control over financial reporting to a company that is poorly run!
      In any case, in a couple of years or so we will see whether the argument you are currently making (i.e. GM is an accident waiting to happen again because they haven’t learned the lessons of their past) holds water or not.

    9. […] November 18th, my video spot for The Street.com on the GM IPO was front page news at that site as well as on […]

    10. @Francine: Talking about a company (GM) that is doomed to yet fail again in the not so distant future

      FYI:
      1- “…GM reported in its 2010 fourth quarter financial release that the audit committee of its board had concluded material weakness in internal controls over financial reporting no longer existed….” http://detroit.cbslocal.com/2011/03/10/general-motors-cfo-resigns/
      2- “…GM’s First 2011 Quarterly Net Income is $3.2 Billion Profit (including $1.7 Billion extraordinary Items…” http://wot.motortrend.com/gm-earnings-75091.html
      3- “…GM to add 4,200 jobs in 8-state hiring blitz as a result of a $2-billion-plus investment…” http://www.freep.com/article/20110510/BUSINESS01/105100361/GM-add-4-200-jobs-8-state-hiring-blitz?odyssey=tab|topnews|text|FRONTPAGE
      4- For your convenience, take a quick peek at the 2013 Chevy Malibu: http://www.netcarshow.com/chevrolet/2013-malibu/800×600/wallpaper_06.htm

      I will be back with more updates as they become available.

      Ciao

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