By on August 23, 2010

[Ed is away at the Nissan Juke junket playing [Magic], so I’ll try to keep the ship afloat today]

There are plenty of caveats and warnings  in GM’s IPO documents, but one doesn’t need to read all 734 pages to get a bit nervous. On page 25, there’s this:

“We have determined that our disclosure controls and procedures and our internal control over financial reporting are currently not effective. The lack of effective internal controls could materially adversely affect our financial condition and ability to carry out our business plan.”

For years, old GM had problems with its accounting controls and reporting (odd for a company run by head bean-counter Rick Wagoner), and in 2009 finally settled a case with the SEC. That supposedly led to a complete overhaul of financial controls and reporting. 

Last year’s bankruptcy led to “fresh start accounting”, but the specter of mis-counted beans still haunts New GM:

“Until we have been able to test the operating effectiveness of remediated internal controls and ensure the effectiveness of our disclosure controls and procedures, any material weaknesses may materially adversely affect our ability to report accurately our financial condition and results of operations in the future in a timely and reliable manner. In addition, although we continually review and evaluate internal control systems to allow management to report on the sufficiency of our internal controls, we cannot assure you that we will not discover additional weaknesses in our internal control over financial reporting.”

One would have hoped that GM’s accounting systems had been dyno-tested before the big IPO, and all that’s riding on it. It’s a bit like the bad old days: new GM products being rushed to market before the bugs are all fleshed out.

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28 Comments on “GM: “Our Internal Controls Over Financial Reporting Currently Not Effective”...”


  • avatar
    Educator(of teachers)Dan

    As I’ve said before, this would be funny if it wasn’t our money.

    “For years, old GM had problems with its accounting controls and reporting (odd for a company run by head bean-counter Rick Wagoner), and in 2009 finally settled a case with the SEC.”

    Actually I would think an accountant (if he was dishonest) would be the perfect guy to teach you how to “game the system.”

  • avatar
    Cammy Corrigan

    “we cannot assure you that we will not discover additional weaknesses in our internal control over financial reporting.”

    Who wants to lay a bet down that shortly after GM is fully floated and no longer the United States government’s problem, GM will suddenly announce that their “profits” were actually losses? Or there will be a “one time” write-off?

    • 0 avatar

      Exactly what I thought when someone here (or at AB) mentioned the thing about making the company “appear” to make $1B/quarter;

      right up until they just happen to be forced to take a 1-time $20B writedown sometime later on.

    • 0 avatar
      KixStart

      Cammy, that’s the stuff shareholder lawuits are made of.

    • 0 avatar
      Robert Schwartz

      Kik: It would be, but, you can’t sue the US government for this one.

      http://truthonthemarket.com/2010/08/20/the-gm-ipo-the-new-jersey-pension-fraud-and-the-bailout/

    • 0 avatar
      gslippy

      @KixStart: Couldn’t Cammy be right? Doesn’t this statement by GM constitute sufficient warning to a potential stockholder that their “profit” could actually have been a loss, therefore releasing GM from liability?

    • 0 avatar
      dhathewa

      You can’t just make sh!t up and then add a disclaimer to erase the possibility of a lawsuit. If the financials aren’t done in good faith, there’s grounds for a suit.

      On the other hand, to paraphrase Lincoln:

      “When I fooled you once, that was shame on me.”
      “Now, I’ve fooled you twice (thrice… and more), so it’s now shame on you.”

  • avatar
    daviel

    another reason not to buy GM stuff, IMO.

  • avatar
    jkross22

    We have determined that anything we tell you is potentially wrong…. that even though we’re going to be a publicly traded company again, that we don’t have the confidence in our financial controls to know whether what we tell you is correct or not.

    Seriously, who in their right mind would buy stock in this company.

    What’s that? We already are the primary equity holders? Great.

  • avatar
    Bridge2farr

    “Give me my money back! It must be fleet sales! Who would buy anything from this company!”
    Same old same old here at TTAC.

    • 0 avatar
      gslippy

      Well, it’s the same old GM, that’s why.

      What about GM’s “ineffective controls” statement gives you confidence?

    • 0 avatar
      Monty

      It’s not a statement you would have ever heard from Old GM, though.

      Like, isn’t it possible that there are serious changes underway at the RenCen?

      Can’t some of the GM haters take off the blinders and look closer at what’s been happening?

      Better vehicles. Working all of the bugs out of the Cruze and the Volt prior to release (as short as a decade ago both of the aforementioned cars would have already been rushed to market, with the predictable disastrous results). Some interesting departures and some excellent hires (especially marketing). GM also seems to have defined and targeted the core brands a lot better than before.

      This is not a quick fix that happens overnight – GM has forty years of malaise to undo. But, to me, seeing that paragraph means some executive of GM has recognised and identified the problem, blamed only the company, not the imports or the general public, and all without a fifty page powerpoint presentation.

      I believe there’s hope for GM.

    • 0 avatar
      jkross22

      Monty,

      New GM has been playing the same games old GM has been playing.

      “We’ve paid back all the government loans. Early. With interest.”
      “The Volt gets 230 mpg.”

      Moreover, one of the many purposes of a real bankruptcy is to right the ship, and financial controls are a key part of that. That wasn’t done with GM. Even worse, they’re filing for an IPO with the mess still not cleaned up.

      This IPO is a rush job that apparently has more political motivations than savvy business decision making driving it.

    • 0 avatar
      Monty

      @jkross22 and gslippy –

      Here’s what the Forbes article states:

      “In recent years, GM – a company traditionally run by bean counters – had a habit of restating its quarterly results long after the quarter had closed. In January 2009, GM settled a case filed by the Securities and Exchange Commission over the way it accounted for pensions and other issues. The company identified problems with its bookkeeping and put in a number of remedies that year.

      GM said it had reason to believe the fixes were sufficient, but then it filed for bankruptcy in mid-2009, and that created a whole new set of financial problems. When it emerged 40 days later, the company once again had to restate earnings under what’s known as “fresh start accounting.”

      All of which is to say GM’s finance department was very, very busy over the past year and a half. As a result, it really hasn’t been able to fully test the new policies and procedures to see if they are effective.

      Now, of course, GM goes on to say “we believe that there are no material inaccuracies or omissions of material fact and, to the best of our knowledge” the figures for 2009, both before and after bankruptcy, and for the first half of 2010 are accurate.”

      The crux of what GM is stating is that the company believes that the remedies undertaken have solved the reporting issues, but have not been able to effectively test the systems. That’s a much different interpretation from yours which is claiming that it’s still “business as usual” and that there has been a concerted effort to cover-up massive losses, to be written down as special items during the next quarter.

      Look, I’m not saying everything is unicorns and rainbows at “New” GM; but the simple fact of GM noting this in the filing, AND NOT ASSIGNING BLAME TO ANOTHER PARTY or minimising it as a “perception problem” tells me that there are changes afoot at the RenCen.

      Of course there’s been mis-steps; the loan payback ads being the most egregious, but I can state as a small business partner, with a total of ten employees, that even getting a small group to change their mindset can be a frustrating and convoluted process. I can’t even begin to imagine what a tough task it is within GM.

      The fundamental change of attitude that GM so desperately needs won’t occur within a year, but there is some evidence of GM actually saying there’s a problem, and attempting to fix it. That is not how the “Old” GM would have handled this.

      All I’m asking is for people to take off the blinders and look at the situation more objectively. If you’re constantly going to look at every GM story through the same filter, you’re no different than a Democrat that can’t see a Republican as being anything other than a Neo-Conservative right-wing Christian lunatic. With the Exception of a few fringers, we know that’s not really a valid description of most Republicans, is it?

  • avatar
    Zackman

    I have a very funny feeling about this. A friend of mine told me GM would be gone in two years. That was a year ago. Hmmm.

    GM + China. A marriage made in heaven? Bye, Bye American Pie. Ford is next, whether they like it or not. The only thing of value this country will then manufacture are weapons, which consume our own money. The practice of robbing Peter to pay Paul has pretty much run its course.

  • avatar
    Robert Schwartz

    “One would have hoped that GM’s accounting systems had been dyno-tested before the big IPO, and all that’s riding on it.”

    Not to mention the brand new CEO. In the ordinary course, I think most underwriters would tell GM that March 2012 is the earliest you could do a successful underwriting.

    This is another reason to believe that this whole thing is political. If the offering doesn’t happened before Nov 2, they might just kick it back a year and a half.

    • 0 avatar
      dhathewa

      Not necessarily wholly political. The “Government Motors” meme is a marketing distraction. Going public probably helps their image. Although an IPO is a risk.

      Hmmm… the IPO is probably a bigger risk for the Administration. If they don’t get a decent chunk of change for however much they choose to sell off, the Republicans can actually assign a dollar value on the loss to the Administration’s investment. Given that a “profit” seems unlikely, I’d think the Administration would be happier waiting until next year for an IPO, too.

    • 0 avatar
      gslippy

      A poor IPO will hurt politically regardless of when it’s done, but now would be the most costly. Waiting until 2012 hurts the POTUS more than anyone else.

      A “good” IPO would be good for the country, and would weaken the arguments of those who oppose bailouts (like me). But I don’t see how GM can emerge from an IPO showing strength.

  • avatar
    gslippy

    Has GM claimed an actual date for their IPO, and what are the chances they never follow through, and that RF is right after all?

  • avatar
    Jeffer

    Let’s not forget the 15 Consumer’s Digest “awards” that GM “won”.
    That’s when I knew nothing had changed at GM.

  • avatar

    The DuPont Model, developed in 1914 by F. Donaldson Brown of chemical company DuPont de Nemours & Co, is a set of financial ratios and key figures relating to the Return on Investment (ROI). It is a technique that can be used to analyze the profitability of a company using traditional performance figures. It integrates… elements of the Income Statement with those of the Balance Sheet. THAT’S LEADERSHIP AND HOW TO RUN A COMPANY!!!

    Red Ink Rick was a disgrace and even the mention of his name is an insult to the dedication of thousands, who over the decades, built a great corporation only to see it destroyed by a figurehead front man for the banksters who bled it dry.

  • avatar
    ciddyguy

    Here is my thought, as stated in my online journal late last week as roughly translated.

    I think in the end, Ford will may well be #1 if the Fiesta and other models are of any indication and if Chrysler and Fiat do their part in this partnership, Chrysler could well be #2, neither of them have ever been 1 or 2 as far as I know, GM will be #3 if what I read of Paul’s post on their financial situation in regards to the IPO. I read that their most current chief stepped down, just before the IPO announcement and went home to Texas, the last thing GM needed and that left me with a feeling that GM may not be changing like they should and that was found in the Financial Times late last week.

    The operative word is that while Ford had their share of problems, they didn’t seem to fall as far as GM did and Chrysler had relied on one platform for nearly all their fleet back in the 80’s and early 90’s, instead of using the money coming in to develop other platforms to grow their product line and Daimler basically robbed them and squeezed them dry so I can’t say it was ALL Chrysler’s fault for that.

    In the end, I think GM has more to amend than the other two in this regard and thus, that was what I read in this post by Paul, that the new GM is the old GM in essence.

    And I should add that this won’t occur over night, but rather over time as things play out amongst all three, but it is clear they are making strides to update and upgrade their product, just that each is going at it differently, some more successfully than others.

  • avatar
    Mike Kelley

    This sounds like the automotive version of “close enough for government work”.

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