SEC Ends GM Accounting Probe. What's the Point?

Robert Farago
by Robert Farago
sec ends gm accounting probe what s the point

Indeed. Now that General Motors depends on Uncle Sam for its survival, why would the Securities and Exchange Commission (SEC) levy a fine against the ailing American automaker? Answer: it wouldn’t. Under the terms of the deal with GM [full press release after the jump], the SEC ends its investigation into the company’s bookkeeping without a GM admission of guilt or a cash fine. Oh, and GM pinky swear promises it won’t ever do it again. The settlement and dispensation adds to Rick Wagoner’s growing rep as the industry’s Teflon Don. Lest we forget, Wagoner was GM’s Chief Financial Officer from 1992 to 1998, before becoming Chief Operating Officer (2000) and then CEO (2203). His career at GM (the only career he’s ever had) began as an analyst in the treasurer’s office. If Wagoner didn’t know the books were cooked, why didn’t he?

“The Securities and Exchange Commission today filed settled charges against General Motors Corporation (GM) relating to its disclosures concerning two pension accounting estimates, and its projected cash contributions to its pension plans, as well as errors in its accounting for derivatives and various other transactions. According to the SEC’s complaint, filed in federal court in the District of Columbia, GM violated the issuer reporting, books-and-records, and internal controls provisions of the federal securities laws.

With regard to GM’s pension plans, the complaint alleges that GM made material misstatements or omissions in its 2002 Form 10-K concerning the disclosure of two critical pension accounting estimates – its pension discount rate for 2002 and its expected return on pension assets for 2003.

According to the complaint, GM had stated publicly in an August 2002 pension conference call with analysts that it used a duration matched approach to select its discount rate, but failed to disclose in its 2002 Form 10-K that its use of a 6.75% discount rate was developed from a non-duration matched approach, which was materially higher than the rate developed from a duration matched model. In addition, the complaint alleges that with respect to the discount rate, GM maintained inadequate internal controls to provide reasonable assurance that transactions would be recorded as necessary to permit preparation of financial statements in compliance with generally accepted accounting principles, including a process for reviewing and adopting discount rate recommendations to provide reasonable assurance that the recommendation was developed in a reasoned and unbiased manner.

The complaint further alleges that since at least the mid-1980s, GM’s expected return assumption had never been higher than its most recent 10 year average return. In its 2001 Form 10-K and during the August 2002 pension call, GM referred to its rolling 10 year historical average return of 10% or better as support for the reasonableness of its 10% expected return assumption. In its 2002 Form 10-K, GM did not state that its most recent 10 year average return was below its new assumption set at year-end. According to the complaint, if GM had used an expected return consistent with its 10 year historical average, it would have reduced its 2003 pre-tax earnings by $680 million.

The complaint also alleges that in that same 2002 Form 10-K and in three 10-Q filings, GM failed to disclose material information about the timing and amount of its projected cash contributions to its pension plans to avoid variable rate premiums to the Pension Benefit Guaranty Corporation (PBGC) and the impact such contributions might have on its liquidity and capital resources.

With regard to GM’s other transactions, the SEC’s complaint alleges that GM made material misstatements that included improperly accounting for a $97 million transaction involving the sale and repurchase of precious metals inventory in its 2000 Form 10-K; prematurely recognizing in its 2001 Form 10-K and Q3 2001 Form 10-Q a $100 million signing bonus it received for entering into a railroad shipping contract; and improperly accounting for two types of derivatives contracts – a Canadian dollar mirror hedge strategy and “normal purchase normal sale” arrangements of commodities – in its 2004 Form10-K. The complaint also alleges that GM maintained inadequate internal controls in these areas and maintained inaccurate books and records in connection with these transactions.

GM simultaneously settled the charges, without admitting or denying the allegations, by consenting to the entry of a final judgment permanently enjoining it from violating Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, and 13a-13 thereunder. The settlement is subject to court approval.

The Commission notes the assistance of the PBGC.

The investigation is continuing as to others.”

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  • Hughie522 Hughie522 on Jan 23, 2009

    @scartooth If Americans wanted quality products produced in environmentally sound conditions by a well treated labour force they would have payed a premium for them to be made locally. But Americans would not pay that premium, complained (as they do today) about the high price of grocerries and other goods and therefore companies have to source these goods from countries where they are produced more cheapy by compromising on those very things you claim Americans demand. Would Chevy had sold as many Aveos if they cost as much and were as sparsely equipped as the Mini?

  • Detroit-Iron Detroit-Iron on Jan 23, 2009

    Robert, Do you really think GM (or red-ink Rick)is going to last until 2203?

  • Cprescott The cost of these golf carts will be the deciding factor
  • Golden2husky Cash for clunkers was a horrible waste of resources. "Car dealers are asset rich and cash poor. Cash flow is something we look at every single day in a car dealership," she continued. "What if that $200,000 the government owes me is the same time I have a big payroll, and I have floorplan to pay off and, oh, it's tax time? All of a sudden, the dealer is in a cash crunch."Oh, my heart is just breaking for them...and with all that ADM, they can go screw themselves...they should have a line of credit. Use it.
  • Sgeffe How much of a current draw is one of those digital plates?
  • Ajla I had a chance to drive a few Toyota/Lexus products the last two weeks. The turbo-4 is basically charmless. I don't see much reason to go for it over the over the 2.5L or a HSD hybrid. Maybe if you live at higher elevation?The "HybridMax" is interesting. The stronger rear motor gives it more of a RWD feel. It isn't a sporty powertrain but was reasonably smooth and powerful.
  • MaintenanceCosts A fair deal would be a single tier with at least a 33% raise for everyone over the life of the contract to make up for recent inflation and quite a few below-inflation years.Retiree health benefits and pensions are ridiculous, could legitimately bankrupt the automakers (unlike the raise), and shouldn't be in the deal.I'd really like to see the union accept a bit less cash and go after the 32-hour workweek harder. I think all of our society would be better on a four-day-a-week schedule, with little if any loss of output - business after business has found that people are more productive with four-day schedules, and almost everyone who tries it keeps it.