GM and GE – Both Have Poor Internal Controls
“News” broke yesterday that GM reported, “ineffective internal controls over financial reporting might make it difficult for the company to execute on its business plan.” They are also still under investigation by the SEC on several matters, including financial reporting related to pension accounting, transactions with suppliers including GM’s former subsidiary Delphi Corp., and transactions in precious metals.
I have to reluctantly agree with this analyst, even though I don’t completely understand the superficial view that “investors/traders” have taken. Don’t they see the examples of companies that “quickly and suddenly decline” when “suddenly” the lack of internal controls, lack of scrutiny by auditors and lack of transparency in financial reporting about risks finally come to light?
Kevin Tympana, auto analyst with Argus Research, said he doesn’t anticipate the stock taking a hit due to the comment in the filing. “These are not the issues this stock trades on. It trades on how it’s doing with the turnaround plan,” said Tympana. “At this point if you’re not aware of accounting issues, you haven’t been paying attention. There’s the SEC accounting probes going on and the long delay in this filing. It shouldn’t be a surprise to anyone keeping half an eye on the company.”
But I also don’t understand why GM has to fall on their sword over and over again and take all of this heat and bad press when GE has had the same adverse opinion on their internal controls by their external auditors and their own management over and over again and multiple restatements and no one bats an eyelash (or reports on it)?
Is it because of the glow of Jack Welch, that paragon of virtue, integrity and management by execution? Is it because of the fine management examples of his proteges when they went to other companies? Or is it because GE still reports a profit? Beware, as we have seen, when companies can’t get the numbers right or when they don’t clearly understand the risks of their business (or disclose them fully to their shareholders) and where they pay the executives who manage the company (and their friends who manage other companies) more than the GDP of an emerging market country, the “numbers” may only be as solid as the surface of the river outside my window. The surface cracks when a little warm sunlight starts to illuminate the murky depths.
Note: Deloitte is GM’s external auditor. KPMG is the co-source partner for GM in its internal audit function, providing up to 25% of the staff for this function.
KPMG is GE’s external auditor.
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