The Growing Concern over “Going Concern”

GM's dismal-future disclosure from Deloitte is just one of many that will be part of an "unprecedented" trend this year, experts predict.

In what may have been a gross understatement, General Motors CFO Ray Young summarized 2008 as “a tough year” in a conference call with investors last week. And GM’s future certainly didn’t look any brighter today, as Deloitte & Touche expressed its doubts that its carmaker-client will stay viable.

In the GM annual report filed today, the company carried the auditor opinion that GM had warned last week would be coming. “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,” wrote Deloitte.

Even with GM’s prediction of the Deloitte opinion, Thursday’s news could not surprise followers of GM’s many problems — including its request for more government bailout funds, closures of some of its brands, and the likelihood it’ll burn through $14 billion in cash this year. These issues have been accelerated by poor car sales across the auto industry as consumers have cut back on spending. In his Q4 2008 conference call last week, Young acknowledged the likelihood of Deloitte’s going-concern disclosure as well as his company’s $30.9 billion loss for the year, a near-record annual loss, rivaled only by its 2007 loss of $38.7 billion. A GM spokeswoman said today that Young was too busy this week to talk to CFO.com for this story.

A New Phrase for the Lexicon
GM, though, is only one of the more prominent potential casualties of the credit crisis and recession to be in danger of getting a going-concern qualification stamped on its year-end financial filings. Indeed, just as stakeholders have become evermore preoccupied with the words “liquidity” and “cash flow,” they have also begun to keep a sharper eye on their companies’ ability to continue as a going concern. “Over the last couple of months, it’s been really amazing how many clients have worked ‘going concern” into their lexicon,” says Jack Zwingli, CEO of risk-analytics firm Audit Integrity, whose customers include insurance companies, auditors, and institutional investors.

Says Grant Thornton CEO Ed Nussbaum, “We’ll see an unprecedented number of going-concern footnote disclosures and clarification from the auditors.”

Surely, the auto industry will see an uptick in going-concern doubts, but other sectors could get stuck with more of the qualifications as well, Nussbaum adds. Homebuilders, financial services firms, and retailers are particularly hurt by financial crisis. And companies in other industries with heavy debt loads may also have to go through their auditors’ going-concern wringer.

As a result, there have been more uncomfortable conversations between companies and their auditors. And those discussions likely will become lengthier and more intense as both parties work their way through new accounting guidelines that call on management to look out further than their auditors when assessing their companies’ sustainability. The new rules — which the Financial Accounting Standards Board plans to release by the end of this month for filing periods ending after June 15, 2009 ­— could lead to “a direct and very public disagreement over going concern between auditor and management,” the Ohio Society of CPAs predicted in a letter to FASB.

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