Case 2.4- General Motors Company
Case Study for Advanced Accounting
Case 2.4- General Motors Company
Mike Jones
Liberty University
Case 2.4- General Motors Company
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Summary
Few companies in American history have seen far-reaching peaks and valleys such as
General Motors. At one point in time General Motors (GM) was seen as at the apex of global
auto manufacturers. “For 77 years, from 1931 through 2008, GM reigned as the number one
automobile manufacturer worldwide.” (Knapp, 2018). Despite their prolonged interval of
brilliance and much like other companies during this time, General Motors brilliance began to
sour. As noted, ultimately “the rescue of the US automobile industry amid the 2008–2009
recession and financial crisis was a consequential, controversial, and difficult decision made at a
fraught moment for the US economy (Goolsbee, & Krueger, 2015).
As noted, “Similar to many companies, GM was victimized by the economic crisis
triggered in late 2008 by the collapsing housing prices and the implosion of the subprime sector
of the mortgage industry.” (Knapp, 2018) Furthermore, this caused a financial disaster as the
housing market tribulations compromised the auto arena as well. General Motors had ongoing
internal financial complications where bankruptcy was probably certainly on the horizon besides
the ongoing implosion of the housing market. The internal financial complications included
pension plans that were constituted early in General Motor’s existence that were paid to former
employees and executives. As noted, “those large expenses stemming from GM’s pension plan
and other post-retirement benefit plans added significantly to the company’s cost of producing
automobiles.” (Knapp, 2018) Eventually it became obvious that key executives internally were
displaying a false narrative, as they were not in the budgetary position to be allocating the
economic capital these pension plans pledged. As noted, “easily one of the most controversial
issues surrounding GM’s financial problems in early 2009 was what would happen to the
company’s huge and significantly underfunded pension plan if the company failed.” (Knapp,
2018)
Case 2.4- General Motors Company
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According to Maryanne Keller, a longtime automotive analyst she wrote GM’s
management manipulated financial data to hide its pension plans issues. Moreover, this is
evident when we examine the discount rate for pension liability that they selected in 2002, as
they chose 6.75 in lieu of a much lower rate. Officials within GM were even able to persuade
auditors from Deloitte that the rate was satisfactory. However, the Securities and Exchange
Commission (SEC) filed a complaint with GM for misreporting their financial statements.
Furthermore, the debacle that occurred in 2002 led to a deliberate balanced deterioration that
peaked in 2008. Ultimately, GM was overextended by promising their employees for fifty plus
years astonishing pension plans and other unsurmountable benefits but didn’t have the capital or
cash flow to sustain it.
Moreover, GM ultimately folded and filed for bankruptcy. The execution of the
bankruptcy forced General Motors to revise their retirement and pension plans. GM ultimately
switched from a defined benefits plan to a defined contribution plan that based payouts on the
performance of each employee’s account. As noted, “the old pension program is known as a
defined benefits plan, meaning GM was obligated to pay retirees a certain amount, depending
on their years of service and pay level. By switching to a defined contribution plan, GM would
no longer have to worry about covering gaps created by market downturns, as payouts are based
on the performance of each individual’s account.” (Bunkley,2012) Furthermore, GM offered a
lump sum to employees in order to eliminate the longer-term pension liabilities which reduced
their pension plan burdens significantly. Nowadays, General Motors is unequivocable
continuing to produce high quality vehicles and reinventing itself as a top American brand name
in the automotive industry, However, poor commitments to pension plans can have grave
consequences.
Case 2.4- General Motors Company
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Questions:
1.Auditing standards don’t specifically discuss the audit procedures that should be applied to a
client’s pension-related financial statement amounts. Identify five audit procedures that
would be relevant to those items. For each audit procedure that you list, identify the related
audit objective.
As noted, “Employee Retirement Income Security Act (ERISA) refers to a federal law that
protects the retirement assets of American workers. The law, which was enacted in 1974,
implemented rules that qualified plans must follow to ensure that plan fiduciaries do not
misuse plan assets.” (Kagan, 2021) Furthermore, (ERISA) generally requires employee
benefit plans with 100 or more participants to have an independent financial statement
audit. There are different audit policies that are crucial to audit financial statements,
especially when employee benefits are presented. One such policy is to authenticate that the
plan is pliable with the risk level. This should be done by examining the plan documents for
investment objectives and the objective should insure the it meets plan objectives and stated
risk levels. Next, the participant data must be tested, to ensure that collection is being
accrued correctly. Ultimately, minute meetings must be mirror in order to make sure that
purchases are in compliance with the policy of the plan that has been selected by the
business. The fourth audit procedure that is imperative examining current investment
holdings to ensure that they are currently held at fair value.
2.Under what general circumstances should auditors retain outside experts to assist them
in completing an audit? How could an expert be useful in auditing a client’s pension-
related financial statement items?
Case 2.4- General Motors Company
Standards (GAAS). The experts should be peculiar in auditing pension fund plans because of
the procreating of far-flung and offshoot securities that could be held by the
pension funds. Some pension funds have moved to more unusual investments in an
endeavor to get healthier returns as interest rates on traditional investments have dwindled.
An accomplished expert can be notably useful in the undertaking to designate a fair value to
intricate value investments. Moreover, in the illustration of defined benefit plans,
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The auditors should seek the guidance of accomplished experts in completing an audit when
a particular aspect of the audit cannot be completed within Generally Accepted Auditing
accomplished experts also provide direction on the actuarial assumptions used to accrue
funds and obligations in the benefit plan.
.
3.Do you believe that Deloitte behaved properly by accepting GM’s decision to apply a 6.75
percent discount rate to its pension liabilities? What, if any, other steps or measures
should
Deloitte have taken under the circumstances?
It is noteworthy to mention that the auditors had unduly influence by the client management
in their acceptance of the 6.75 percentage discount rate. This acceptance process represented
that the auditors were not conforming to the professional standard to be independent. Also,
they were anticipating management’s rather straightforward calculation of an appropriate
discount rate based on a very miniscule data sample. Under these conditions, Deloitte
auditors should have had more of an engagement with management in the process of
discussing the potential risks and consequences of using a more intrusive discount rate and
Case 2.4- General Motors Company
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justify management’s decision to do so. Additionally, auditors could have obtained
comprehensive range of experts to obtain consensus of justified discount rates from similar
companies.
Christian World View Statement
The main assertion that could be erected from a Christian World view perspective is the
notion that General Motors was unwilling to listen to Deloitte recommendations. As noted,
(Psalm, 500 B.C.) “God if our refuge and strength, an ever-present help in trouble”. As we can
self-judge, GM was certainly in financial trouble and should have pursued help and counsel.
Ultimately, without pursuing help to lead to the demise of GM.
4.Did the choice of the 6.75 percent discount rate in 2002 have a material impact on
GM’s financial statements? Defend your answer.
Absolutely, the 6.75 percent discount rate clearly had a material impact on GM’s financial
statements. If GM went with the 6.50 percent rate that was suggested by Deloitte, “[it]…
would have increased GM’s total pension liability reported on its balance sheet by
approximately 10 percent or $1.8 billion and would have reduced the company’s stockholders’
equity by approximately 16 percent or $1.1 billion” (Knapp, 2028). If this significant drop in
their financials had occurred it would have possibly produced sooner bankruptcy.
Case 2.4- General Motors Company
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References
Bunkley, N (2021). New York Times article titled, “General Motors Changes Pension Plans for
Salaried Workers”. Retrieved from https://www.nytimes.com/2012/02/16/business/gm-eliminates-
pensions-for-salariedworkers
Goolsbee, A., & Krueger, A. (2015). The Journal of Economic Perspectives article titled, “A
Retrospective Look at Rescuing and Restructuring General Motors and Chrysler.”
Retrieved from http://liberty.summon.serialssolutions.com
Kagan, J. (2021). Investopedia. An article titled, “Employee Retirement Income Security Act
(ERISA)” retrived from https://www.investopedia.com/terms/e/erisa.asp
Knapp, M. C. (2018). Contemporary auditing real issues and cases. Cengage learning.
Psalm 46:1 (500 BC) Retrieved from https://www.biblestudytools.com/topical-verses/the-25-
most-read-bible-verses/
