GM filing warns on reporting
Financial controls being fixed
More than a year after it settled a government lawsuit and restated six
years of financial results, General Motors on Wednesday warned potential
investors that internal financial controls are still not effective but
it's working to fix the problem.
The Securities and Exchange Commission sued GM in 2004, alleging the
automaker misstated assets of pension funds. The company settled the
case in January 2009 without a fine or admitting wrongdoing. The SEC
said GM agreed to change accounting practices so the problem would not
But in regulatory filings about its upcoming initial public offering, GM
warned potential investors that "our internal controls of financial
reporting are currently not effective."
Experts are divided on whether the warning -- one of about 30 risk
factors identified by GM in a document describing a planned sale of
shares -- is just an obscure accounting matter or a red flag that taints
GM's financial reporting.
GM reported a $2.2-billion profit in the first half of this year,
compared with a $4.4 billion loss during the same period a year ago.
"As an investor, I would want to know if you had these problems what are
you doing about them now?" said Peter Henning, a Wayne State University
law professor knowledgeable about securities law.
Actually, GM has worked on this issue for some time. In a separate
recent SEC filing, the company answered this way:
"During the six months ended June 30, 2010, management led various
initiatives, including training, to help ensure the controls related to
the period-end financial close process would operate as they had been
designed and deployed during the 2009 material weakness remediation
efforts," the company stated.
Progress will be updated with each quarter's financial results, GM
spokeswoman Renee Rashid-Merem said.
One expert advised against reading too much into it.
"If it were important, it would say precisely what the problems were.
This type of language is in almost every prospectus," said Linda
Killian, principal at Renaissance Capital in Greenwich, Conn.
Still, Killian said four risk factors stood out as issues:
• The U.S. Treasury will continue to own a substantial interest in GM
after this offering.
• GM's planned investment in new technology is significant and may not
be funded at anticipated levels.
• Volatile oil prices could weaken demand for more-profitable vehicles
such as large pickups and SUVs.
• Even though the UAW will manage the Voluntary Employee Beneficiary
Association, GM is obligated to contribute large amounts of cash in the
future, including three installments of $1.4 billion on July 15, 2013,
2015 and 2017.
Another source of tension between management and the U.S. Treasury might
be the latter's oversight of executive compensation. That control will
continue until Treasury sells its last share of GM, said a source
familiar with the policy. "These actions may materially adversely affect
our ability to hire and retain salaried employees," GM stated in the
registration. "At the same time we have substantially decreased the
number of salaried employees so the workload is shared among fewer
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