GM's 10Q Filing

by Ken Elias

November 12th, 2008 7:20 AM

Here’s the money shot from GM’s quarterly filing with the SEC:

“In connection with their year-end audit of our annual financial statements, our independent auditors assess whether a statement should be included in their audit report related to the existence of substantial doubt related to our ability to continue as a going concern. If the report on our audited financial statements included such a statement, we would not be in compliance with the covenants in certain significant credit agreements, including our $4.5 billion secured revolving credit facility and $1.5 billion U.S. term loan, both of which would be callable by the lenders. Additionally, we have other significant obligations that include cross-default provisions that could be triggered by a failure to comply with those credit agreements. We would need to seek a waiver from the lenders for any covenant breaches or cross defaults, or arrange for substitute financing. There is no assurance that we could cure a default, secure a waiver or arrange substitute financing in such circumstances or that we would not incur significant costs in doing so.”

This is the big fear at GM: auditors issue a statement regarding GM’s ability to continue as a ‘going concern.’ It would start a customer-killing PR firestorm, launch a possible “run on the bank” scenario by suppliers and trigger immediate default ratings by the credit rating agencies.

Ken Elias

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4 of 25 comments

Stein X Leikanger on Nov 12, 2008
TexN : November 12th, 2008 at 12:09 pm Help me out here: Does their 10Q filing say that they are a going concern or not? If the auditor is stating that they are still a viable enterprise (against all reasonable analysis that they are), aren’t they opening themselves up for the mother of all lawsuits if/when things go even further south? I’m thinking the obvious parallel is Arthur Anderson & Enron. What am I missing here? GM is advising investors and the public, through their 10Q, that their auditors have expressed doubts as to their viability as a company. This is probably a compromise hashed out in collaboration with the auditors, in lieu of the auditors making the statement themselves. Wouldn't be surprised if it clears the auditors - but it's just smokes and mirrors.

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Landcrusher on Nov 12, 2008

tools, If the Japanese played that card, we would simply play the "lawsuit" card, followed by the "American automotive company start up boom" card, and then the "thanks for playing" card. Any strategy that ends up with the American public getting angry is a loser. I am quite sure the Japanese are aware of this concept.

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Pch101 on Nov 12, 2008
What am I missing here? The quarterlies (10-Q's) aren't audited. The annual statements (10-K's) are. Because the quarterlies aren't audited, they allow for a bit more "interpretation" on the part of management. They don't have an auditor's opinion because they aren't audited. GM's fiscal year is based upon a calendar year (January - December.) So the statement as of 12/31 will be audited, unlike this one. Typically, managers negotiate with auditors over the language and content of their findings. Accountants and ratings agencies have to compete for business, so nobody wants to be too hard assed, lest they lose clients over it. But with all of the blame being tossed at accountants and ratings agencies these days (unfairly, in my opinion), accountants are shifting into CYA mode. You can expect much tougher audits this year than you've seen in awhile, as the fear of legal consequences takes priority over fears of losing clients. The fit will hit the shan during the year end, when the bad news gets shifted into high gear, because it won't hidden as easily as it was during the quarterlies. This is true for all sorts of companies, not just GM, but GM has become the bad news story of the year and this year-end nuke will surely get lots of attention when it goes off.

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TexN on Nov 12, 2008

Stein X & Pch101, Thanks for the clarifications and insight. If I were an auditor, I would still have to steer clear of this slippery slope. I guess that's why there are lots of high-priced lawyers on retainer........... Tex

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