The first signs of financial distress occur in the period year 2004-2005. Although GM recorded significant growth in the value of total assets, stockholders' growth, revenues, operating income, and cash flow from operations in the year 2003-2004, the performance quickly reversed in the year 2004-2005. The total assets of the company and revenues showed a moderate decline, while stockholders' equity, operating income net income, and cash flow from operations declined all by more than 50%. The decline in assets implied consumptions of assets such as cash, accounts receivable, cash equivalents, and prepaid expenses through the company's operations. Decrease in assets may also mean loss of value of asset or selling of the assets (Low et al, 59). A decrease in the stockholders' equity implies a decline in the assets, and an increase in the liabilities. The net impact is a decrease in the value of the investment made by shareholders' in the company. Negative operating income, net income and cash flow from operations meant that the company mad significant losses during the year. Despite improvements in the period between 2005 and 2007, the performance in the year 2004-2005 was the first indication of GM's financial distress. The stock prices of a company are determined by the demand for a company's share in the market. GM's stock prices decreased significantly between 2004 and 2005, implying a significant decline in the stock demand by investors. Despite struggling to regain value in the period 2005 and 2007, the stock price reached a minimum in 2008.
According to the FASB, going concern refers to substantial doubt that a company would be able to meet the financial obligation due within a period of 1 year. ASC 205-40-50 expects auditors to evaluate probable cases of going concerns based on the measures that have already been implemented by the organization rather than unimplemented mitigation effects (Elizabeth et al., 353). Examples of plans that cannot be considered if not already executed by the company include plans such as rescheduling of loans, borrowing loans, or disposing of an asset that has not been actually executed. SAS 132 tasks auditors with the role of collecting and verifying evidence about the existence of going concerns. The auditors must evaluate whether there exists a reasonable time that the company can exist as going concern (Elizabeth, et al., 365). The effects of disclosure of going concerns must also be considered before the auditors can determine whether there exists substantial doubt warranting the reporting of disclosure of going concern. The auditors are expected to make an opinion about going concerns upon ascertaining the appropriateness of such concerns, the existence of substantial doubt, and adequate disclosures of going concerns. ASC 205-30 requires auditors to review possible going concerns identified by the management and discuss going concerns if not identified by the management.
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The significant decline in the company's total assets by more than 500% relative to the year ended 2004 indicate a growing inability to meet the financial obligations. The standards set for auditors to give an opinion of going concerns are high and are only reasonable when all other options are exhausted, leaving the company's management with the option of filing for liquidation. Although the company's total assets declined in the period 2005-2007, the company's revenue, operating income, net income, cash flows from operations, and stock price fluctuations suggested hope of recuperating from the financial troubles. The auditors were therefore justified to rule out the appropriateness of going concerns, the existence of substantial doubt, and adequate disclosures of going concerns until 2008 when the company was clearly headed for liquidation if not for government interventions.
According to Verick et al., the United States experienced the effects of the great economic recession of 2008-2009, which later spread to other countries in the world. The crisis was precipitated by a continuous decrease in the Federal Bank's base rate since 2001, causing banks to issue large mortgages at low-interest rates to millions of citizens who would not have qualified for the mortgages under normal circumstances. The move causes an increase in the prices of homes due to increased demand. When the interest rates finally began to increase, the demand for houses dropped, causing a drastic decline in the prices of houses. People who had used mortgages were suddenly unable to repay the loans because of adjusting banks' interest rates. The case was even worsened by the fact that the homeowners could not loan money against increasing prices of the homes. Banks stopped lending money to the public, causing a decrease in the money supply and hence the demand for products and services. In the meantime, the mistrust due to fears relating to solvency among banks led brought interbank lending to a halt. Businesses in the United States utilized a wide range of austerity measures that included lowering consumption and laying off workers leading to high unemployment. Panic among consumers caused increased cuts in spending and withdrawal of deposits from banks hence worsening the situation. As people lost their jobs, savings, and homes, the poverty levels in the US increased by 12.5% at the beginning of the recession in 2007. GM Company, therefore, had no chances of improving revenues, rescheduling loans, or borrowing in order to service the financial obligations due. The economic recession, therefore, contributed to ascertaining the conditions necessary for the issuance of modified audit opinion to disclose going concerns.
After GM's bankruptcy in 2009, the established New GM was majorly owned by the US government, 60%, and the Canadian government, 11.7%. The conditions necessary for issuance of modified audit opinion to disclose going concerns changed dramatically because of the ability of the governments to support the payment of financial obligations using funds raised from taxes. ASC 205-40-50 require auditors to critically evaluate probable cases of going concerns based on the already implemented measures that mitigate the effects (Elizabeth, et al., 353). Examples of plans that may be considered if implemented include rescheduling of loans, borrowing loans or disposing an asset that have not been actually executed. Giving up a significant proportion of ownership to the US and Canadian government and the creation of two GM companies was a key move that improved the company's ability to meet future financial obligations. Under the SAS, 132 auditors are expected to collect and verify evidence about the existence of going concerns (Elizabeth et al., 365). The auditors must evaluate whether there exists reasonable time for the company to pull out of financial distress, substantial doubt about the possibility of pulling out of financial distress, and adequate disclosures of going concerns in the financial statements. If the financial statements do not reflect identified going concerns, auditors are allowed to discuss with the management.
The opinion of going concerns uncertainties indicates that a company is headed for liquidation unless external interventions, for example, by the government as in the case of GM. Since vehicles require subsequent maintenance and come with risks of default that may need recalling, purchasing from a company that is on the verge of liquidation would be unwise. Although an auditor's opinion of going concerns would decrease the prices of stocks due to lower demand, common stocks of such a company remain extremely risky because holders have a residual claim to proceeds received from liquidation. Even preferred stocks remain risky due to the shrunk level of total assets.
Work Cited
Verick, Sher, and Iyanatul Islam. "The Great Recession of 2008-2009: Causes, Consequences, and Policy Responses." (2010).
Carson, Elizabeth, et al. "Audit reporting for going-concern uncertainty: A research synthesis." Auditing: A Journal of Practice & Theory, 32.sp1 (2013): 353-384.
Low, Soo-Wah, Fauzias Mat Nor, and Puan Yatim. "Predicting corporate financial distress using the logit model: The case of Malaysia." Asian Academy of Management Journal 6.1 (2001): 49-61.
