General Motors has recently disclosed on more than one occasion that “we have determined that our disclosure controls and procedures and our internal control over financial reporting are currently not effective.” It remains to be seen how this warning affects future earnings reports, but we can review GM’s past to see how previous financial reporting internal control flaws played out.
Well prior to General Motors’ previous accounting woes culminated in a bankruptcy filing in June of 2009, we had these statements from then CEO Rick Wagoner, “General Motors Corp. has made significant progress on its turnaround plan in the past year, reducing costs and rolling out new products. It’s important to understand that our goal in this restructuring is not just to change GM’s bottom line from red to black. Our goal is to structure GM for sustained profitability and growth to set us up to be successful for years to come.” These statements came back in mid-2006, but sound eerily similar to rhetoric we hear from GM today.
Around the same time that Wagoner was touting a bright future for General Motors, the following accounting issues developed. In November of 2005 earnings were restated for 2001 and 2005 to reflect deeper losses. In March of 2006 an adjustment for an additional $2 billion of losses was made to 2005 earnings. GM also delayed its annual report with the SEC after discovering accounting errors at GMAC (now Ally Financial). The SEC subsequently investigated GM relating to the accounting issues, primarily revolving around benefit plan assumptions and a questionable precious metals transaction. Additional accounting adjustments and filing delays occurred in early 2007. Then CFO, Fritz Henderson, stated that the accounting issues should not hurt GM’s credibility and “we just have a lot going on”.
General Motors’ past accounting problems should compel potential investors and pundits alike to be skeptical when GM again warns that they have ineffective internal controls. The SEC, as well, should be vigilant and ensure that GM’s annual report contains accurate financial statements as required by the Securities Exchange Act of 1934. Individual investors have the right to expect accurate accounting before investing in a publicly traded company. General Motors’ next order of business should be to assure that its accounting methods and controls are reliable.