GM: Running on Empty? GM: Running on Empty? C11 Founded in 1908, General Motors Corp. (GM) is truly an iconic 1931 through 2008, GM was the world's automobile the first company in peaked at 51 percent in 19 to repot more than $1 billion in revenues. GM's market share American corporation. From s largest automobile manufacturer, and in 1955, it became s domination in the market was such that many recommended under antitrust laws. In 1971, former President L.yndon Johnson t what's good for General Motors really is good for America. GM's net income reached an all-time high of $6.7 billion in 1997, and the automaker continued to generate positive net income through 2004. In 2005, things began to change. GM reponed a net loss of more than $10 billion and continued to post losses through 2008, with a loss of almost S31 billion in that year. (GM's cash flow from operations in 2008 was a negative $12 billion.) A summary of various measures of GM's financial condition for the six-year period from 5 through 2008 is presented in GM Exhibit 12 IT 1 Financial General (amounts in 2003 2004 2005 2006 2007 2008 Total assets Stockholders' equity Revenues Operating income Net income Cash flow from operations7,600 448,507 $479,603 $476,078 $186,192 $48,883 $91,047 25.268 27,726 14.597 (5,440 M,094) ps,155; 182,543 193,571 192.605 207,349 181,112 148,979 2.862 12.081 (16,93) 0668) 4,390) (21284 3822 2.805 no,567) (1.978) ,732) CO,860) 13,061 (16,856 (759)7 Source: General Motors Corp. 2003-2008 10-K repons Because of concens with the ultimate impact of GM's financial struggles on the world economy, GM received $13.4 billion in government loans in December 2008. President Barack Obama's administration pledged interim financing to allow GM to develop a restructuring plan. requested then-CEO Rick Wagoner to resign, and announced a plan to replace at least 6 of the 12 members of GM's board of directors. All of these events occurred in a market in which the economic conditions sharply decreased demand for automobile purchases. Not surprisingly, GM's stock reached a low (at that time) of $0.75 per share on May 29, 2009 (for comparison, GM's stock traded between $27 per share and $94 per share from 1983 to 2004). GM's high, low, and closing stock prices for the period 2003-2008 are summarized in GM Exhibit 2 In its March 4, 2009, report on GM's financial statements, GM's auditors (Deloitte & Touche) concluded that GM's financial statements were fairly presented in conformity with GAAP $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 r 2 w, and rices: Corp. Close High Loww so.00 2003 2004 2005 2006 2007 2008 Source: Whartion Research Data Services. However, Deloine expanded its report to include the lies reganding GM's ability to continue as a going concern:grph to recognize uncentain C12 Cases December 31,2008 financial statements for the year ended Dece as a going financial statements, the s recurring have been As discussed in Note 2 to the stockholders" deficit, and inability to generate suff operations raise substantial doubt about its uh fe losses from operations s plans concerning these matters are al solity to meet its obligations and sustain its tinue as a going Note 2 to the consolidated financial statements. The consolidated financial include any adjustments that might result from the outcome of this uncertainty ents do GM'S REORGANIZATION In April 2009, GM's Chief Executive Officer Frederick "Fritz" Henderson (who to unsecured across the three groups) would be reduced by $44.6 billion in exchange for a 74 company. In addition, the terms of this plan called for the c Wagoner) created a restructuring plan to save GM. Under this plan, the debt ow sdeed R a 99 percent imteres of 42 percento bondholders, the United Auto Workers, and the U.S. government (which tora in the GM's dealers the terms of the bankruptcy plan, two entities were created: an "old GM majority owned by the U.S. government (a 60 percent stake), with the Canadiantht is Buick, Cadillac, Chevrolet, and GMC brands. General Motors Co. emerged from ban bined entity prebankruptcy) and General Motors Co. (the new GM that emerged postba On June 1, 2009, the once unthinkable happened: GM filed for Chapter 11 Motors Liquidation Company), a public company that owns four brands in the proces phased out (Hummer, Sab. Poatiac, and Saturn), and a "new GM," a private company rheing (11.7 percent), United Auto Workers (17.5 percent), and GM's unsecured bondholders (1 cent) owning large minority stakes. The new GM (known as General Motors Co.) ved y and com- began its operations on July 10, 2009, just 40 days after the filing. A brief profile of GM (the nkruptcy) is shown in GM Exhibit 3.4 A BOOST FOR THE AUTO INDUSTRY On July 1, 2009, the U.S. govenment announced the Car Allowance Rebate Program (popularly known as the "Cash for Clunkers program) to provide incentives for the automobile industry. Ini- tially, S1 billion was appropriated for this program, but overwhelming demand from consumers resulted in an additional $2 billion allocation when the original funds were exhausted. More than 690,000 transactions were rebated under this program, 17.6 percent of which were for General Motors Co.automobiles. Despite this program, GM's 2009 retail sales were down 17 percent from 2008. EPILOGUE In November 201 0, GM returned to public company status with an initial public offering that raised $23.I billion, one of the largest such offerings in the history of the United States at that time: GM's stock price closed at $34.19 that day. Deloitte & Touche's opinion on GM's 2010 IBIT 3 General orp. and otors Co. General Motors Corp. (prebankruptcy) $176 91,000 General Motors Co. $48 68,500 Brands 5,900 47 3,600 34 financial statements (issued on March 1, 2011) concloded that GM's financial stements were presented in conformity wich GAAP and made no reference to the going-concers uncen GM had previously faced. GM has returned to profitability with reported net incme controlling interests and preferred dividends) of $6 2 billion. 59.2 billion, and sh.2 hily 2011, and 2012, respectively; however, as of mid-2013, its stock price had above its public offering price, to $34.96 per share. On June 5,2013 (less than four years bankruptey), GM rejoined the S&P 500, replacing Heina following its Hathaway GM Running on Empty C13 before no in 2010, In 2014, GM was forced to recall over 29 million automobiles, a afier its by Berkshire its acquisition ned sales for 2005 through 2014. Most notable among combined were faulty ignition switches that was aware of this potential fault number thast exceeded their the defects prompting these recalls prevented airbags from deploying in the event of a crash (GM In September 2015, GM t prior to announcing the recall.) entered into a deferred prosecution agreement with the U.S. Depart ment of Justice, paying $900 million However, GM still has significant potential liability relaned to the defective ignition switches Through January 2016, a total of 121 putative class action suits are pending against GM related to these recalls, alleging diminution in value of the vehicles punitive damages, and injunctive and other relief. In addition, a total of 244 personal injury cases are pending against GM alleging injury or death as a result of the defects. To date, GM has taken total charges of $2.0 billion against net income in 2014 and 2015 and has recognized a liability ot S66 million for future payments as of December 31, 2015 In spite of these matters, GM has remained highly profitable, reporting net income of $3.9 billion high in 2014 and $9.7 billion in 2015. And, it has received unmodified opinions f (Deloitte & Touche), with no mention of this potential liability in their reports. DISCUSSION QUESTIONS I. Reviewing GM's financial information in GM Exhibit l and its stock price in GM Exhibit 2. 2. In referencing professional standards, what factors should auditors consider in evaluating 3. Considering your response to questions 1 and 2, do you believe that the going-concen uncer- when do you first see signs of GM's impending financial distress? potential going-concern uncertainties? tainty was warranted? Do you believe that Deloitte& Touche should have issued a going- concern opinion prior to 2008? Deloitte & Touche's decision to issue an audit opinion modified to disclose going-concern uncertainties? 4. What economic factors existing in the United States during 2008 might have accelerated that led to the issuance of the going-concern uncertainty? What issues would auditors need to consider in evaluating the ability of General Motors Co. (the new GM) to continue as a going 5. Do you believe that the events immediately following GM's bankruptcy alleviated the concerns company receives a going-concern opinion, customers will not purchase products with warran- ties, suppliers will not provide short-term credit, and investors and creditors will not invest or loan). Would GM's going-concern opinion influence your decisions regarding either purchas. ing a car from GM or investing in GM's stock? Is a going-concern a self-fulfilling prophecy? concern? 6. Many companies believe that a going-concern opinion is a selfulfilling prophecy (i.e, when a GM: Running on Empty? GM: Running on Empty? C11 Founded in 1908, General Motors Corp. (GM) is truly an iconic 1931 through 2008, GM was the world's automobile the first company in peaked at 51 percent in 19 to repot more than $1 billion in revenues. GM's market share American corporation. From s largest automobile manufacturer, and in 1955, it became s domination in the market was such that many recommended under antitrust laws. In 1971, former President L.yndon Johnson t what's good for General Motors really is good for America. GM's net income reached an all-time high of $6.7 billion in 1997, and the automaker continued to generate positive net income through 2004. In 2005, things began to change. GM reponed a net loss of more than $10 billion and continued to post losses through 2008, with a loss of almost S31 billion in that year. (GM's cash flow from operations in 2008 was a negative $12 billion.) A summary of various measures of GM's financial condition for the six-year period from 5 through 2008 is presented in GM Exhibit 12 IT 1 Financial General (amounts in 2003 2004 2005 2006 2007 2008 Total assets Stockholders' equity Revenues Operating income Net income Cash flow from operations7,600 448,507 $479,603 $476,078 $186,192 $48,883 $91,047 25.268 27,726 14.597 (5,440 M,094) ps,155; 182,543 193,571 192.605 207,349 181,112 148,979 2.862 12.081 (16,93) 0668) 4,390) (21284 3822 2.805 no,567) (1.978) ,732) CO,860) 13,061 (16,856 (759)7 Source: General Motors Corp. 2003-2008 10-K repons Because of concens with the ultimate impact of GM's financial struggles on the world economy, GM received $13.4 billion in government loans in December 2008. President Barack Obama's administration pledged interim financing to allow GM to develop a restructuring plan. requested then-CEO Rick Wagoner to resign, and announced a plan to replace at least 6 of the 12 members of GM's board of directors. All of these events occurred in a market in which the economic conditions sharply decreased demand for automobile purchases. Not surprisingly, GM's stock reached a low (at that time) of $0.75 per share on May 29, 2009 (for comparison, GM's stock traded between $27 per share and $94 per share from 1983 to 2004). GM's high, low, and closing stock prices for the period 2003-2008 are summarized in GM Exhibit 2 In its March 4, 2009, report on GM's financial statements, GM's auditors (Deloitte & Touche) concluded that GM's financial statements were fairly presented in conformity with GAAP $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 r 2 w, and rices: Corp. Close High Loww so.00 2003 2004 2005 2006 2007 2008 Source: Whartion Research Data Services. However, Deloine expanded its report to include the lies reganding GM's ability to continue as a going concern:grph to recognize uncentain C12 Cases December 31,2008 financial statements for the year ended Dece as a going financial statements, the s recurring have been As discussed in Note 2 to the stockholders" deficit, and inability to generate suff operations raise substantial doubt about its uh fe losses from operations s plans concerning these matters are al solity to meet its obligations and sustain its tinue as a going Note 2 to the consolidated financial statements. The consolidated financial include any adjustments that might result from the outcome of this uncertainty ents do GM'S REORGANIZATION In April 2009, GM's Chief Executive Officer Frederick "Fritz" Henderson (who to unsecured across the three groups) would be reduced by $44.6 billion in exchange for a 74 company. In addition, the terms of this plan called for the c Wagoner) created a restructuring plan to save GM. Under this plan, the debt ow sdeed R a 99 percent imteres of 42 percento bondholders, the United Auto Workers, and the U.S. government (which tora in the GM's dealers the terms of the bankruptcy plan, two entities were created: an "old GM majority owned by the U.S. government (a 60 percent stake), with the Canadiantht is Buick, Cadillac, Chevrolet, and GMC brands. General Motors Co. emerged from ban bined entity prebankruptcy) and General Motors Co. (the new GM that emerged postba On June 1, 2009, the once unthinkable happened: GM filed for Chapter 11 Motors Liquidation Company), a public company that owns four brands in the proces phased out (Hummer, Sab. Poatiac, and Saturn), and a "new GM," a private company rheing (11.7 percent), United Auto Workers (17.5 percent), and GM's unsecured bondholders (1 cent) owning large minority stakes. The new GM (known as General Motors Co.) ved y and com- began its operations on July 10, 2009, just 40 days after the filing. A brief profile of GM (the nkruptcy) is shown in GM Exhibit 3.4 A BOOST FOR THE AUTO INDUSTRY On July 1, 2009, the U.S. govenment announced the Car Allowance Rebate Program (popularly known as the "Cash for Clunkers program) to provide incentives for the automobile industry. Ini- tially, S1 billion was appropriated for this program, but overwhelming demand from consumers resulted in an additional $2 billion allocation when the original funds were exhausted. More than 690,000 transactions were rebated under this program, 17.6 percent of which were for General Motors Co.automobiles. Despite this program, GM's 2009 retail sales were down 17 percent from 2008. EPILOGUE In November 201 0, GM returned to public company status with an initial public offering that raised $23.I billion, one of the largest such offerings in the history of the United States at that time: GM's stock price closed at $34.19 that day. Deloitte & Touche's opinion on GM's 2010 IBIT 3 General orp. and otors Co. General Motors Corp. (prebankruptcy) $176 91,000 General Motors Co. $48 68,500 Brands 5,900 47 3,600 34 financial statements (issued on March 1, 2011) concloded that GM's financial stements were presented in conformity wich GAAP and made no reference to the going-concers uncen GM had previously faced. GM has returned to profitability with reported net incme controlling interests and preferred dividends) of $6 2 billion. 59.2 billion, and sh.2 hily 2011, and 2012, respectively; however, as of mid-2013, its stock price had above its public offering price, to $34.96 per share. On June 5,2013 (less than four years bankruptey), GM rejoined the S&P 500, replacing Heina following its Hathaway GM Running on Empty C13 before no in 2010, In 2014, GM was forced to recall over 29 million automobiles, a afier its by Berkshire its acquisition ned sales for 2005 through 2014. Most notable among combined were faulty ignition switches that was aware of this potential fault number thast exceeded their the defects prompting these recalls prevented airbags from deploying in the event of a crash (GM In September 2015, GM t prior to announcing the recall.) entered into a deferred prosecution agreement with the U.S. Depart ment of Justice, paying $900 million However, GM still has significant potential liability relaned to the defective ignition switches Through January 2016, a total of 121 putative class action suits are pending against GM related to these recalls, alleging diminution in value of the vehicles punitive damages, and injunctive and other relief. In addition, a total of 244 personal injury cases are pending against GM alleging injury or death as a result of the defects. To date, GM has taken total charges of $2.0 billion against net income in 2014 and 2015 and has recognized a liability ot S66 million for future payments as of December 31, 2015 In spite of these matters, GM has remained highly profitable, reporting net income of $3.9 billion high in 2014 and $9.7 billion in 2015. And, it has received unmodified opinions f (Deloitte & Touche), with no mention of this potential liability in their reports. DISCUSSION QUESTIONS I. Reviewing GM's financial information in GM Exhibit l and its stock price in GM Exhibit 2. 2. In referencing professional standards, what factors should auditors consider in evaluating 3. Considering your response to questions 1 and 2, do you believe that the going-concen uncer- when do you first see signs of GM's impending financial distress? potential going-concern uncertainties? tainty was warranted? Do you believe that Deloitte& Touche should have issued a going- concern opinion prior to 2008? Deloitte & Touche's decision to issue an audit opinion modified to disclose going-concern uncertainties? 4. What economic factors existing in the United States during 2008 might have accelerated that led to the issuance of the going-concern uncertainty? What issues would auditors need to consider in evaluating the ability of General Motors Co. (the new GM) to continue as a going 5. Do you believe that the events immediately following GM's bankruptcy alleviated the concerns company receives a going-concern opinion, customers will not purchase products with warran- ties, suppliers will not provide short-term credit, and investors and creditors will not invest or loan). Would GM's going-concern opinion influence your decisions regarding either purchas. ing a car from GM or investing in GM's stock? Is a going-concern a self-fulfilling prophecy? concern? 6. Many companies believe that a going-concern opinion is a selfulfilling prophecy (i.e, when a