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Why investors should skip the GM IPO Add to ...

That should be troubling to investors, who need reliable financial disclosures to figure out how much a stock is worth.

In its recent IPO filing, GM said it's been working on improving its accounting procedures, but as of June 30, "our disclosure controls and procedures were not effective at a reasonable assurance level." In other words, it's not there yet. Although many risk factors listed in an IPO filing are standard, only companies that have a track record of financial mismanagement tend to confess that more problems could pop up.

GM's most recent admission is not the first time the company has said its finances are sloppy. GM has a history of financial irregularities: The company admitted major mistakes five times from 2005 to 2009 and had to restate earnings for a variety of reasons, like misstating pension accounting and booking questionable transactions with its supplier, Delphi.

Since 2006, GM has promised three times that it would fix its accounting irregularities. The impact of those restatements was minimal, but eventually the company slid into bankruptcy because of a host of other problems. Once they began diving into the company's books, members of the government's autos task force said they were shocked how little GM knew about its own finances.

GM has a new chief financial officer, former Microsoft executive Chris Liddell, a hard-charging executive who's known for making changes. But GM may still have a problem.

Questions have arisen over the company's decision to book $30.2-billion in goodwill as an asset, even though goodwill isn't something the company can sell, use to invest in new products or help improve its business any other way. It also counts as a bigger asset on the books than all of GM's property ($18.1-billion) and its cash ($26.8-billion).

Goodwill is usually created when an acquiring company pays more than the book value for the assets of a company it's buying. It only becomes an issue for investors if the acquisition turns out to be a dud and the acquirer has to take what's known as an impairment charge to write down the value of the goodwill account. That reduces reported earnings.

In GM's case, the opposite might happen - it could be forced to reduce its goodwill and take an earnings charge if its financial picture improves. How is that possible? The accounting specifics are arcane, but the short answer is that accounting rules allowed it to pump up the value of potential tax-loss credits it could use to offset future taxable income precisely because its earnings outlook going forward is so cloudy. A similar approach was used in valuing employee benefits it's on the hook to pay.

The upshot is that if GM is as successful as its executives hope it will be, goodwill-related charges to earnings might be a recurring and unpleasant surprise for shareholders. "It's another reason why I would not personally think it's time to invest in GM," says law professor Robinson.


The United Auto Workers union has gone from a drag on the company to a part owner. How the new relationship will play out is still unknown.

The UAW owns 17.5 per cent of GM right now, and has the option to buy 2.5 per cent more before the end of 2015. It could sell stock during the IPO or hunker down and remain a major player.

But arguments over wages will likely start cropping up, and will become even tougher to deal with as GM talks about how financially secure the company is now.

The biggest grumbling among autoworkers is the new two-tier wage system, under which some workers can earn $29 an hour and new hires get only half that. It's a system that makes shareholders and executives happy because it brings labor costs in line with non-unionized workers at Toyota and Honda plants in the South. But it could spell trouble for GM if the new wage system creates unrest with workers.

"It's hard to run a business where some people are making double what others are making for the identical job," Mr. Robinson says.

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