^{General Motors Revved Up Its Accounting}

The press release lists its accounting problems, and it is interesting that all of the errors were initially in favor of the company's position. One might expect that if these errors were purely accidents or oversights, then they would have a normal distribution. Some errors should be favorable and some would be unfavorable. As all of the errors were in favor of GM, one must conclude that during 2000-2004 the managers of GM adopted an aggressive accounting policy.

In the 2005 report, there are four issues. First, ResCap wrongly put some mortgage loan transactions in the operating section of the cash flow statement instead of the investing section. While incorrect, this indiscretion is relatively minor. Any good analyst focuses on free cash flow (operating cash flows minus capital expenditures) instead of cash flow from operating activities alone. As such, I don't care about the geography of mortgage loan transactions within the cash flow statement; it won't affect my estimation of free cash flows since these transactions are capital expenditures. Nonetheless, ResCap and its parent should utilize correct accounting in the first place.

Second, GM changed its restructuring charge from $1.3 billion to $1.7 billion. As the estimation of restructuring costs involves a lot of guesswork, this seems merely a change in estimate. Interestingly, the reason management gives for the increased cost is the expiration of the current labor contract in September 2007 and the expected increase in various labor-related items afterwards. On the other hand, it makes one wonder whether this change, and maybe the others as well, are made to obtain some negotiating power vis-à-vis the labor unions.

The third area involving an accounting change is an increase of its liabilities with respect to Delphi, a former member of the GM family. Specifically, GM made some guarantees to some of Delphi's labor unions and, with Delphi's bankruptcy, GM will have to deliver on those guarantees. The previous estimate was $2.3 billion; now GM estimates $3.6 billion.

A fourth item that affects the 2005 10-K is the recognition of an impairment loss to goodwill of $439 million. GM had recognized this loss before at the GMAC segment level but had not recognized it in the consolidated reports. Somehow, management convinced itself that it could recover the amounts at the corporate level. GM now rectifies this by recognizing the impairment loss in the consolidated statements.

In addition to these changes, GM reports some problems and errors with previous SEC filings. First, GM improperly recognized various rebates and other inventory credits prior to the recognition of the associated revenue ("prior to completion of the earnings process”), which reduced cost of goods sold too soon. Second, GM now recognizes a warranty expense that previously bypassed the income statement as an equity transaction. Third, GM now expenses some previously capitalized amounts relating to a Delphi plant contract. Fourth, GM understated the healthcare cost rate and has now increased its OPEB costs in 2002 and 2003. And fifth, it reverses a gain it had recognized on the disposal of some precious metals because of a repurchase agreement.

In summary, GM's accounting provided felicitous impact on the income statements of the past several years that didn't reflect its economic reality. We can congratulate GM's managers for making these admissions and making changes to the affected financial statements. But, one wonders when this merry-go-round will stop. I know that I have seen enough accounting restatements for my lifetime, if not also for the lifetimes of my children and grandchildren. When will these restatements end? When will corporate America come to grips with accounting ethics? When will corporate boards of directors do their job and oversee the behaviors of their managers?