Plan Against Deloitte Doubts on Going Concern
In the recently issued March 4th financial year 2008 10-K annual SEC filing for General Motors Corporation, Deloitte & Touche, its public auditors surprised everyone by expressing serious doubt about GM’s ability to continue as a going concern in their auditors opinion to GM’s financial statements. Not that the auto industry’s woes are not publicly known, but a definitive statement on “substantial doubts” on a “going concern” are strong words to place in a public document. This can immediately trigger a number of covenants and provisions in bondholder contracts to potentially lead to repayment of principal and eventual bankruptcy. However, GM has been able to negotiate with its lenders to forgive at least this breach of covenants.
Nonetheless, GM’s stock cratered 15% yesterday March 5th on release of the 10-K and Deloitte’s opinion. Which just shows the awesome power that the Big Four firms have over their clients’ market capitalization and perhaps even survival.
So this is what Deloitte said rather crisply in its opinion in the 10-K:
“…The Corporation’s recurring losses from operations, stockholders’ deficit, and inability to generate sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern.”
And this sort of serious doubt by public auditors does generally mean that bankruptcy under Chapter 11 or 7 may be the only option left for GM.
Today, Steve Harris, GM’s VP of Corporate Communications refuted this in his FastLane GM Corporate Official Blog http://fastlane.gmblogs.com/:
“Restructuring the business out of court remains the best solution for GM and our constituents. We’ve established a clearly-defined plan to restructure our business and restore GM to long-term viability, and we are aggressively executing that plan through a series of actions we outlined on February 17.
As a prudent business measure, we have analyzed various bankruptcy scenarios, yes. (We were asked to by the government, don’t forget.) However, we firmly believe that an in-court restructuring would carry with it tremendous costs and risks, the most significant being a dramatic deterioration of revenue due to lost sales.
That’s the deal, folks. We haven’t changed our thinking. You analyze every option, but you move ahead with the one you think is best for the company. That’s what we’re doing.”
So, GM continues to believe that its Viability Plan executed out of court and out of bankruptcy is its best option. Deloitte have indeed set off a public relations firestorm for GM, with the corporation doing its best to thwart off negative opinion among the public. With the audit opinion done, Deloitte may have little role to play as the drama goes on between GM, its investors, the Obama Administration and GM’s bondholders.