I first see signs of GM’s impending financial stress through financial information in 2005. Although revenues remained constant at 2005 compared with 2004, the expenses increased drastically and caused the net income to change from positive to negative. The stockholders’ equity decreased by 47% as well, and the cash flow from operations was a huge deficit. Those awful performances in finance and operation also imposed a significant negative influence on stock price of GM. In 2005, annual high, low and closing stock price all decreased by more than $10. These indicators demonstrated that GM faced severe financial difficulties. Sales could not cover the high expense, and the negative cash flow could not meet its obligations.
According to AU 341, auditors should first consider certain conditions or events in evaluating potential going–concern uncertainties. These conditions and events include negative financial trend, other indications of possible financial difficulties, internal matters, such as labor difficulties, and external matters that have occurred, such as legal proceedings and legislation. Then Auditors should consider management’s plans, such as plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures and plans to increase ownership equity. So the factors, including financial, operation and legal conditions and management’s plan should be taken into account when auditors evaluate potential going-concern uncertainties.
The recurring operating loss, negative cash flows from operating activities and the stock price which reduced to all-time low in 2008 all showed the negative financial trend. Moreover, auditors could discover the GM management’s plans to dispose of several brands, to restructure debt and to lay off a lot of employees. Both of the financial condition and management's plans showed substantial doubt about GM’s ability to continue as a going concern for a reasonable period of time.
Furthermore, I think, Deloitte & Touche should have issued a going-concern opinion before 2008. The stockholder's equity declined drastically since 2005, and became negative in both 2006 and 2007. GM reported operating losses for three consecutive years prior to 2008. The total assets of GM also shrink by two thirds as of 2007. All the indicators mentioned above demonstrated the auditors should have issued a going-concern opinion at least in 2007.
The 2008 economic crisis accelerated Deloitte & Touche’s decision to issue an audit opinion modified to disclose going-concern uncertainties. According to AU 341 issued by the PCAOB, auditors should consider external factors, including economic condition, in evaluating potential going–concern uncertainties. Since late 2008, the collapse of the U.S. housing bubble triggered the disaster in the banking system. Because of the financial crisis, the ability of bank credit greatly reduced which directly limited the car mortgages. Moreover people...