This Floyd Norris/NY Times article reports that General Motors’ descent toward what is increasingly looking like an inevitable reorganization is looking absolutely Enronesque:
There was a time when General Motors was seen as the paragon of financial quality. Its bonds were rated triple A, and it was known for the most conservative accounting. Let other companies use liberal accounting rules to make results look better; G.M. did not need such things.
The announcement late Thursday that General Motors would revise profit figures for every year of this decade, and would have to restate the 2005 earnings it had already reported, shows how far the icon has fallen. Less than a year after it lost its investment-grade bond rating, its bonds are viewed as middling even among junk bonds.
“You have to question what controls are in place,” said Charles W. Mulford, an accounting professor at Georgia Tech. “When companies like G.M. are profitable, there is not a need to engage in aggressive accounting. What we are seeing now is a pattern of very aggressive accounting that took them well beyond the limits of generally accepted accounting principles.”
The restatements indicate that G.M. used some highly questionable accounting techniques in 2000, when it seemed to be flying high, and a year later when profits fell sharply.
Funny how those “questionable accounting techniques” occurred both before and after Sarbanes-Oxley, isn’t it?
The situation at General Motors would be much more “Enronesque” if GM had “not” announced on Thursday that it had lost $2 billion more last year than previously reported and GM CEO Rick Wagoner had announced on Thursday that “General Motors is in solid shape.”Very, very strong performance in all sectors,” (see Mr. Skilling’s 7/12/01 analysts call) or perhaps if Mr. Wagoner had said “strong, growing, profitable company” (see Mr. Lay’s 10/23/01 analysts call).
Perhaps if General Motors collapses into bankruptcy seven weeks from now on May 29th and goes out of business it may have some similarity with Enron – but I don’t think that is going to happen.
Mr. Wagoner told the investing public what the situation was, he did not try to hide it, General Motors stock dropped 5% and the sun still came up on Saturday.
If Mr. Lay and Mr. Skilling had told the investing public what was going on at Enron starting around 1999 instead of trying to hide the Enron financial problems, the Enron stock may have dropped significantly but it is possible that Enron would still be in business today and Mr. Skilling would be on his “industrial strength” boat sailing around the world and Mr. Lay would probably be planning on going out to Enron Field to watch the opening of the Astro’s baseball season.
Uh, Max. You need to read the entire article. GM’s accounting irregularities stretch back to 2000 and will require restatement of earnings all the way back to that year.
If you take a look, then you will find quite a few rosy GM management reports to analysts over the past several years.
Tom – I had read the entire article, which contains the following (did not see any need for “overkill”):
The article later quotes from professor Gary J. Previts, of Case Western Reserve University regarding General Motors “I think they are still a quality shop” when it comes to accounting.
The article goes on to state:
“The net result of all the changes, G.M. said in a filing with the Securities and Exchange Commission yesterday, is that its profits from continuing operations will be reduced for every year from 2000 to 2002, increased by a small amount for 2003, and left almost unchanged for 2004.
“The more important change for the future is that G.M. will now have $548 million in a deferred credit for the supplier discounts it previously reported but had not earned. That means that pretax profits in 2006 and later will be that much higher because the credits it wrongly took earlier will now be available again.”
To repeat “That means that pretax profits in 2006 and later will be that much higher because the credits it wrongly took earlier will now be available again.”
Hardly “Enronesque”. Based on the above I would not expect to see the entire General Motors stockholders’ equity of approximately $22 billion be wiped out in the next seven weeks, as Enron’s $11 billion of stockholders’ equity was wiped out in seven weeks from October 16 to December 21, 2001.
Max,
welcomed comment.
Moe
Max, you miss my point. I’m not suggesting that GM has committed fraud with regard to its accounting problems or that its deteriorating situation is the same as Enron’s, although there are similarities.
Rather, the point is that when the markets lose trust in a company — whether it’s GM or Enron — the descent into equitable insolvency is often difficult to stem.
GM’s situation has many advantages that Enron did not. Enron’s problems occurred soon after 9/11 and shortly after the dotcom bust. GM also has the advantage — as did AIG last year — that the markets have the knowledge of Enron and Andersen’s demise, and thus, are not likely to overreact to GM’s bad news.
Nevertheless, there is no assurance that even those advantages will keep GM out of the tank. And the point is that there is nothing necessarily wrong, much less criminal, with that.