Saturday, November 8, 2008

GM says could be out of cash; raises a going concern issue?

I noticed the following headline this week:

GM reports $2.5B 3Q loss, says running out of cash (AP)
AP - General Motors Corp. said Friday it lost $2.5 billion in the third quarter and warned that it could run out of cash in 2009 if the U.S. economic slump continues and it doesn't get government aid.

For accounting and finance professionals -- does this raise a going concern issue for GM and its auditor? And, will prospective buyers be more likely to now avoid purchasing a GM vehicle, thus further increasing going concern issues? Perhaps consideration should have been given to using different wording.

For further relevant going concern accounting literature, consider the following new (October 9, 2008) Proposed Statement of Financial Accounting Standards relating to Going Concern issues.

For your reading enjoyment, the following is additional background information from the introduction to the proposed new standard:

This proposed Statement would provide guidance on the preparation of financial statements as a going concern and on management’s responsibility to evaluate a reporting entity’s ability to continue as a going concern. It also would require certain disclosures when either financial statements are not prepared on a going concern basis or when there is substantial doubt as to an entity’s ability to continue as a going concern. Currently, AU Section 341, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, of the AICPA Codification of Statements on Auditing Standards contains the guidance about the going concern assessment. The Public Company Accounting Oversight Board (PCAOB) adopted AU Section 341 on an initial, transitional basis and has subsequently amended that interim standard.

The FASB is responsible for establishing standards that guide the overall presentation of an entity’s financial statements and related disclosures. The Board believes that accounting guidance about the going concern assumption should be directed specifically to management of a reporting entity because management is responsible for preparing an entity’s financial statements and evaluating its ability to continue as a going concern. Accordingly, the Board concluded that guidance about the going concern assumption also should reside in the accounting literature established by the FASB and decided to issue this proposed Statement.

The Board decided to carry forward the going concern guidance from AU Section 341, subject to several modifications to align the guidance with International Financial Reporting Standards (IFRSs). One of those modifications is to change the time horizon for the going concern assessment. AU Section 341 states that there is “a responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited” (paragraph .02). International Accounting Standard (IAS) 1, Presentation of Financial Statements, requires that an entity consider “all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period” (paragraph 26) when assessing whether the going concern assumption is appropriate. The Board decided to use the time horizon in IAS 1 because it avoids the inherent problems that a bright-line time horizon would create for events or conditions occurring just beyond the one-year time horizon that are significant and most likely would have to be disclosed.

The other modifications to align the going concern guidance with IFRSs include (1) using the wording in IAS 1 with respect to the type of information that should be considered in making the going concern assessment (all available information about the future) and (2) requiring an entity to disclose when it does not present financial statements on a going concern basis. The Board thinks there is no substantial difference between the wording in IAS 1 and the wording previously included in AU Section 341 with respect to the type of information that should be considered in making the going concern assessment. Therefore, the Board does not expect this modification to result in a change to practice.

Dave Tate

Tuesday, October 7, 2008

Needed: mandatory CPE in (1) technical expertise, and (2) responsible decision making!

Some readers are probably aware that as I have shifted some of my focus from discussions about hard technical accounting, auditing and legal issues, to situational and governance discussions analyzing the issue: "how could this have happened?", I have come upon the belief that a significant amount of misfeasance and malfeasance is caused not only by a lack of technical understanding and expertise, but also by the failure of the person to act “responsibly” during the decision making process. To act “responsibly,” or “responsible decision making” in this context means that the person understands his or her duties and responsibilities (and to whom those duties and responsibilities are owed), and then goes about satisfying those duties and responsibilities in good faith to the best of his or her ability through diligent issue spotting, inquiry, investigation, analysis and decision making without self- or conflict of interest.

As I read the news, SEC cases and other materials, there seems to be a significant lack of “responsible” decision making. Now, I do not believe that mandatory CPE will necessarily cure that problem outright, but I do believe that it would help focus attention on the issue, and prompt or help guide many basically honest people to actively advocate for and act in a more responsible manner by using prudent decision making procedures. So . . . I do suggest that a reasonable, not overly burdensome amount of CPE should be mandatory in two broad primary areas for people in certain professions or positions. Those two broad areas are: (1) technical knowledge needed to perform the person’s job or function; and (2) responsible decision making, as discussed above, which would include in-class examples and discussions. How about 16 hours of mandatory annual CPE for officers and directors of public companies, for officers and directors of nonprofit organizations (or at least for officers and directors of nonprofits that exceed a certain threshold amount of annual revenue), and for our federal and state elected representatives in the Legislature? A minimum of 8 hours of annual in-person classroom time in each of the two above-mentioned broad topic areas (technical knowledge; and responsible decision making).

Dave Tate

Saturday, October 4, 2008

Link to a discussion about the new Form 990

The following is a link to a short discussion about the new Form 990 for nonprofit tax reporting entities.

Friday, October 3, 2008

N.Y Times article, '04 SEC rule change allowed investment banks to leverage

Here is one interesting article discussing a 2004 SEC rule change that allowed investment banks to take on considerably more investment debt, in part becoming a contributing factor in the current financial fiasco:

Sunday, September 21, 2008

How did this happen--the bailout--its not the first time--accountants weigh in please!

The current bailout isn’t the first time something like this has happened. As I understand the situation (and please correct me if I am wrong), the value of real estate has declined, and there are too many problem or uncollectible mortgages. Didn’t that happen in the 1980s with the savings and loan debacle? On the one hand, on a large or grand scale, it can be difficult to estimate or value when real estate will decline in value, and, for the most part, in general real estate as a whole does not decline in value. However, as I understand the situation, in the late 1990s or the early 2000s Congress eased the Fannie Mae and Freddie Mac loan qualifying requirements allowing for more risky loans to be made (such as with no money down, or without proof of income). That action, if true, was ill-advised. Does anyone view Congress as being prudent when it comes to issues of money or finances? I don’t. It has also been discussed for some number of years that the real estate market is over heated, and that values may drop. Of course, whether values would drop, and the amount of anticipated drop would be difficult to estimate. How should the lenders take those factors, and the amount of reserves, into consideration? How should the regulatory agencies take those factors into consideration? How should the outside auditors take those factors into consideration? I understand that the outside auditor may well be entitled to take the loan/property appraisals at face value. The point of this discussion is not to find fault. The point is to identify the weaknesses in the system, and to correct those weaknesses so as to better prevent a problem of this magnitude from happening again in the future. And, the problem is a very big problem, which will be paid for by the taxpayers. As I see it, not too long ago a similar fiasco occurred. It is way too early for a similar problem to have occurred. This time the weaknesses in the system need to be fixed. What do you think? How do we fix the problems?

Dave Tate, CPA, Esq.

Sunday, September 14, 2008

Corporate climate change disclosures: Xcel Energy settlement with Cuomo

The following is a link discussing corporate climate change disclosures relating to the Xcel Energy settlement with Cuomo.