I was browsing through GM’s Form S-1 (the IPO prospectus) and these words jumped out at me from the “Risks” section:
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.
Yuh think? I don’t recall a sentence like that being standard boilerplate in documents of this sort. Sure, there are standard disclaimers but this sounds particularly alarming to me.
I don’t seem to be the only person who’s noticed it. A pal of Barry Ritholtz of The Big Picture’s noticed it. InvestorPlace.com has noticed it:
In other words, GM and the Feds believe recent General Motors financial reports could be inaccurate – and thus any recent claims about the company returning to profitability or seeing sales growth could be overstated or flat out false. I suppose the government gets points for admitting this upfront instead of a year from now after glaring errors are uncovered, but it doesn’t do a lot to inspire hope in the company.
May our resident professional investor weigh in?
In the private equity environment you might see something like this. So many acquisition candidates are not audited, but have “reviewed,” “compiled” or “cash accounting” practices. We have ways to deal with it; its part of the investment risk profile.
But GM??!! I suppose this could be over-lawyered posturing. But I think your instincts are correct. WTF????
That’s essentially my question, Drew. GM is supposed to have outside auditors. Was the requirement suspended in 2009? Sort of as though they’d taken the company private?
Or do they have “outside” auditors? IIRC Deloitte & Touche is their auditor. Is the accounting firm a captive of GM? That would pretty much be what I’d assume. Is one of the “Big Four” (formerly the Big Five and before that the Big Eight) at risk?
Sounds like more oversight work to me.
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.
Am I the only one that finds the above funny? I mean, GM is supposed to be a governmental success story, right?
Icepick –
You have a financial background. Have you ever seen anything so bizarre? I’ve looked at a bazillion offering documents in my day, and I can never, ever recall such a blatant statement wrt public securities.
I’ve tried to think of a scenario where this is just over-lawyered exculpatory language. But, anyone, ask your self this: you are a Calpers, State of Michigan Pension fund, Yale Endowment etc etc. Wouldn’t you fall out of your chair, and either summarily dismiss the offering, or demand thorough explanation?
And yet the offering went off. It makes the provisions of Dodd Frank look laughable.
That was my point. I’ve read a number over the years. I don’t recall the like.
As David Hannum put it, there’s a sucker born every minute.
I’m actually going to copy that language onto a letter and attach it to my IRS forms. It’s so much more elegant than my usual, “F–ked if I know, dudes.”
Reynolds, I think your original languange is the more elegant, but that’s still funny!
Drew, my balliwick in finance was modelling and projections. But I read a fair number of contracts and other legal documents back in my actuarial consulting life, and I’ve never seen anything this … blatant. I mean, they’re admitting that they have no idea where the money’s gone, or going, or if there’s any money to begin with.
I’m really struggling to understand how after almost two years and $50 billion spent that they can claim they haven’t established internal control over the finances. It strains credulity.
I’m reminded of a story from old Persian. A blind man was playing chess (Shahtranj back then) with the Shah. The Shah was losing so he simply rremoved a piece belonging to the blind man. Later the blind man said, “If it had been anybody else, I would have complained to the Shah.” With whom will we register complaints on this topic?
And yes, I do find this funny, it a gut clinching makes me sick kind of way.
Ritholtz should have passed on the bet. Ill quote one of his commenters, algernon, to make my point:
I would take that bet too. A company who has had all its billions in debt to bondholders wiped out, been given in excess of $50 billion plus subsidies to its finance arm & some of its products from the government…such a company should be able to survive quite a lot of inefficiency. These are huge advantages it has over its competitors.
Ford, Honda, & Toyata got nothing. The PAY taxes. They have bondholders to whom they must make payments.
algernon would take the bet. But he misses key points in his reasoning. GM wiped out the bond holders, it’s true. They got $50 billion from the governments of the US and Canada, it’s true. They’ve stripped off a lot of unprofitable divisions, it’s true. And with all that, they STILL don’t know where their money is going, or what it’s being used for. Or at least they’re claiming they don’t know – if they do and don’t want to say ….
I’m not sure which way is worse, they know and they don’t want to disclose it, or they have no clue. Neither way is good.
On this front Ford, Honda & Toyota have an advantage because their bond holders are at least going to make a nominal attempt to keep them honest. Nothing like that at GM.
One final note: Anyone think the government will get the $52 a share it needs on the rest of its GM holding to break even?
The government has a dim view of investors. Or, it notes that since there are people willing to buy AIG and GM, why not?
They cannot make a rational case for either company as a going concern, but the market has been telling them they don’t have to.
Icepick brought up a killer dilemma. But I think that the motive behind the former option can’t really be. If so, the statement would be translated as something like this: “Hey, the figures we reported might not be true because we decided to lie as cover-up, and we’re not really going to delve on the possibility of this mishap opening up a need for a portfolio analysis, and that’s because we’re not working up to par in our reporting. So, hopefully this statement sets everything square” It just seems to make more sense that it was a numbers error.
Also, I think it would be at least in the top five financial goals of this administration to keep this giant in line, and that too leads me to believe that it’s more likely that the error’d reporting was down to a numbers problem.
I could be completely wrong though. I’ve never really been able to make much sense of corporate tactics.