By on February 19, 2009

Accounting firm Grant Thornton LLP caught our eye with a press release (via PRNewswire) warning the auto industry of possible “going concern opinions” as auditors complete fiscal year-end reporting. “Going concern opinions” are an auditor’s statement in SEC Form 10-K annual reports that there is substantial doubt about the entity’s ability to continue as a going concern. “It’s important for the public, the supply base and all of the parties involved in restructuring the auto industry not to overreact if they start seeing ‘going concern’ opinions,” says Kimberly Rodriguez, co-leader of Grant Thornton’s global automotive team and a principal in the firm’s restructuring practice. “We’re in uncharted waters and auditors face extremely difficult decisions.” Translation?

Everyone knows most of the industry is bankrupt and it might look bad if auditors don’t acknowledge it. “But,” continues Rodriguez, “we believe the amount of direct government aid to the auto industry, the size of the economic stimulus package and the radical restructurings GM, Ford and Chrysler are undertaking will ultimately help salvage the industry . . . all of this suggests that the best thing we can do in the 10-K season is keep a level head.” Translation: just because your auditor tells you you aren’t viable as a business doesn’t mean you have to file for bankruptcy. Figure that one out.

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13 Comments on “And Out Come The Auditors…...”


  • avatar
    TexN

    If I were an auditor checking the books of any auto or auto related company, I would tread very carefully. Anyone remember Enron? Arthur Anderson? Buehler? Anyone?

  • avatar
    MikeInCanada

    I actually feel a little bit of sympathy for the bean counters on this one.

    Per the regulations, they should be marking down many of these companies as being prime candidates for bankruptcy – however, the unspoken reality is that Uncle Sugar is not going to let any of the major domestic manufactures go under – just yet.

    So, they can report that these companies are in fact bankrupt (Assets = Liabilities + Owners Equity) and face the wrath of their clients, and Gov’t, or they can report that due to ‘other factors’ the companies are solvent.

    Of course in a couple of years when many auto related companies do finally implode here come the lawsuits against the accounts!

    The claim against them will be simple enough. They refused to acknowledge what was clearly shown in the corporate books. They conspired to hide massive losses to the detriment of share and bondholders.

    What are the accounting firms going to say? The Gov’t told us that everything is cool…. don’t worry about it.

    What to do, what to do, what to do…..

  • avatar
    guyincognito

    Correct me if I’m wrong but wouldn’t the issuance of a “going concern opinion” trigger the doomsday credit default swap tranfers process?

  • avatar
    netrun

    Poor bean counters? While I agree they are in a bit of a pickle, I’d think that their management would be smart enough to make sure that they get adequately reimbursed for their difficult situation.

    I think the guy or gal that is considering buying a Detroit 3 vehicle has a much more difficult and sobering decision to make that may have an even greater effect on their long-term finances.

  • avatar
    pnnyj

    netrun :
    Poor bean counters? While I agree they are in a bit of a pickle, I’d think that their management would be smart enough to make sure that they get adequately reimbursed for their difficult situation.

    If they were paid more than normal in return for providing a positive going concern opinion that would make the lawyers’ job ridiculously easy when they inevitably sue the auditors.

    If an audit firm wanted to commit seppuku I can think of no better way to accomplish the deed.

  • avatar
    Mark MacInnis

    As a CPA, and a former auditor, passionate about the auto industry (how’s that for an oxymoron? My mom would say, emphasis on the MORON….)I have seen this coming since last year. Yes, many of us in the accounting profession DO have ethics and integrity, common opinion notwithstanding.

    And not only will this be an issue for the OEM’s, the supply base will face this issue in spades.

    Imagine as an auditor having to form an opinion on the collectability of, say, $20 million or so of Accounts Receivable from Chrysler on financial statements for fiscal years ending on 1/31/09.

    It is gonna get ugly, before it gets uglier….the “Enron” reaction will make audit partners very conservative. Carmageddon, indeed.

  • avatar
    MikeInCanada

    If I remember correctly from accounting class – audit firms are not investigators – rather their only ethical responsibility is to make sure the books actually balance at the end of the fiscal period.

    If while doing this, they find a problem (T&E for Russian Hookers!? Like that’s never happened) they have one of two options. Refuse to sign off on the company financial reports or quit.

    In theory, either action should cause alarm bells to go off at the appropriate regulatory agencies.

  • avatar
    Samir

    In all seriousness, do you need auditors to tell you that GM and Chrysler have going concern issues?

  • avatar
    Mr. Sparky

    When GM and Chrysler say that they must have government money to fund daily operations and those loans are twisting in the political wind, I would say that is a textbook going concern trigger.

    In the accounting world, we assume that companies continue into perpetuity (a.k.a. a going concern). Many of the things that we do in accrual accounting (depreciation, goodwill, etc) are based on this belief. That’s why it is very important for the auditors to flag when that looks like it may not be the case.

  • avatar
    JT

    I may be wrong, (and willingly defer to those with detailed knowledge and experience …Mark MacInnis, et al) but aren’t auditors required by either law or professional code to provide an opinion on the viability of the company just audited?

    I see such opinions frequently in annual reports and similar documents.

    Just wondering.

  • avatar
    50merc

    Finally.

    I’ve been raising this issue for maybe two years. And I’m sure many auditors have been agonizing whether to give “clean” opinions. When a business is in very serious trouble, the realistic thing to do may be to write assets down to liquidation value, and recognize liabilities that will be triggered by defaulting on contracts, etc.

    JT asks, “aren’t auditors required by either law or professional code to provide an opinion on the viability of the company just audited?”

    Yes, but a better way to put it is to say auditors are expected to disclose doubts as to whether the firm is a going concern. See Mr. Sparky’s comment.

    Grant Thornton’s mouthpiece says “we’re” (he means “they’re”) in “uncharted waters.” Uncharted? Hell, anyone with eyes to see could tell GM’s been in a tailspin for years. And auditors shouldn’t count on might-happens or hope-fors to salvage a ship going down.

    As to whether auditors only need to ensure the books balance, I suggest reading about what the draconian Sarbanes-Oxley act imposes on auditors, managers and directors. By the way, RF, that topic’s worth an article.

  • avatar
    Mark MacInnis

    MikeinCanada:

    Actually, it is much more complex than just making sure the books balance: Auditors verify that their client companies follow all the myriad and at times arcane accounting rules in calculating and presenting their financial statements. They also must make a judgment, as this article alludes, to whether a company is a “going concern”, whether the stakeholders (lenders, shareholders, government entities, etc.) have a “reasonable” expectation of the entity continuing in its business, based on all environmental and internal factors. The reason this makes a difference is that the financial estimates and methods can change drastically depending on whether a business is viewed as a “going concern” or not.

    Further, since Enron and Worldcom, et al, auditors must make a determination as to whether TOP management is aware of, and takes full responsibility for, the financial results, all financial statements, and the accounting methods, estimates and calculations used to prepare the financial statements. That way, the CEO’s of the world can’t go Enron on their accountants, the old “I had no clue what the beancounters in the finance department were doing down on the 11th floor!” defense.

    For companies like GM and Chrysler, the auditors are ostensibly hired by the board, and report to the boards audit committee. Typically, at the close of an audit, but before the audit firm issues their audit report, the auditors sit down and have a closing meeting with the top management, and the audit committee.

    I am betting that a fly on the wall at the audit closing meeting over the last few years at GM and Chrysler would have heard many interesting discussions.

  • avatar
    tesla deathwatcher

    As a lawyer in Silicon Valley for the past 20 years, I’ve worked closely with auditors, especially Ernst & Young. I don’t like auditors. Never have. But I must admit they are between a rock and a hard place. And they have my sympathy.

    In my opinion, auditors should work with their clients to help them make their businesses successful. Instead, auditors have been deputized as policemen for the Securities and Exchange Commission and the public. Auditors and clients have become adversaries.

    Should auditors make decisions like whether GM is a going concern? Should they have to?

    I say no to both questions. You don’t need a weatherman to tell which way the wind blows. You don’t need an auditor to see that GM is not a going concern. Any GM stockholder can look at the price of their stock (closed at $2.00 today, for a market cap of $1.22 billion) and tell you that.

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