CASE 2.4
GENERAL MOTORS COMPANY
Synopsis
Billy Durant created General Motors Corporation in 1908 when he merged several automobile
manufacturers that he had acquired over the previous few years. For most of the 20th century, GM
reigned as the largest automobile producer worldwide and one of the U.S.’s most prominent
Many critics had argued for decades that GM’s executives routinely “doctored” the company’s
periodic financial statements to conceal its deteriorating financial health. This case focuses on one
feature of the window-dressing efforts of GM. In early 2009, the SEC released the results of a
lengthy investigation of GM’s accounting and financial reporting decisions over the previous decade.
A major focus of that investigation was GM’s questionable accounting for its massive pension
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Case 2.4 General Motors Company 141
General Motors Company—Key Facts
1. Billy Durant, who worked as an itinerant salesman as a young man, became extremely wealthy
after organizing General Motors in 1908; however, Durant lost his fortune in the stock market and
spent the final few years of his life in poverty and relative obscurity.
3. A key factor that contributed to GM’s downfall was the company’s significant pension and other
postretirement benefit expenses that made its cars more costly than those of foreign competitors.
4. In the decades prior to GM’s bankruptcy filing, critics accused GM executives of “juggling” the
5. Accounting for pension-related financial statement items has long been a controversial issue
6. The FASB’s new standard still allowed companies to manipulate their pension-related financial
8. After initially contesting the 6.75% discount rate, GM’s audit firm, Deloitte, eventually
acquiesced and accepted that rate.
9. Deloitte agreed to approve the 6.75% discount rate after GM officials indicated that they would
10. In a subsequent complaint filed against GM, the SEC maintained that the company’s pension–
11. In January 2009, the SEC sanctioned GM for several abusive accounting and financial reporting
12. In July 2009, the “new General Motors” (General Motors Company) emerged from bankruptcy
proceedings; the federal government was the new company’s principal stockholder.
142 Case 2.4 General Motors Company
Instructional Objectives
2. To identify specific audit procedures appropriate for long-term accrued liabilities such as
pension liabilities.
Suggestions for Use
While developing this case, I reviewed several auditing textbooks to gain insight on the type and
extent of the textbook treatment typically given to the topic of pension liabilities and related
financial statement items. I was surprised to find almost no coverage of that topic. Given the
materiality of pension-related items for many companies, it seems reasonable that we should, at a
minimum, provide auditing students with an overview or “brief taste” of the key audit issues for
those items. This case addresses that need. [Sidebar: No doubt, the auditing of pension-related
Suggested Solutions to Case Questions
1. Listed next are examples of general audit procedures that could be applied to a company’s
reported pension obligation or liability and/or its related pension expense. This list is not intended to
be comprehensive by any stretch of the imagination. The purpose of this question is simply to force
a. 1. Audit objective: To determine whether the client’s pension obligation is recorded
Case 2.4 General Motors Company 143
b. 1. Audit objective: To determine whether the client’s pension obligation is recorded
in the financial statements at the appropriate amount. [“Valuation and allocation”
assertion regarding period-ending account balances.]
c. 1. Audit objective: To determine whether the client’s pension obligation is recorded
in the financial statements at the appropriate amount. [“Valuation and allocation
assertion regarding period-ending account balances.]
2. Audit procedure: Test the mathematical accuracy of the client’s computations of the
pension obligation and pension expense amounts.
d. 1. Audit objective: To determine that all disclosures that should have been included
in the client’s financial statements have been included. [“Completeness” assertion
e. 1. Audit objective: To determine that financial information is appropriately presented
and described and disclosures are clearly expressed. [“Classification and
2. AU Section 336, “Using the Work of a Specialist,” of the PCAOB’s Interim Standards discusses
the general circumstances under which auditors should consider retaining the services of an
independent expert during the course of an audit engagement. This section identifies several types
of specialists or experts that auditors may need to consult on specific engagements including
actuaries, appraisers, engineers, environmental consultants, and geologists. Paragraph .06 of this
section provides the following general guidance for auditors to follow in deciding whether the
services of a specialist should be retained:
“The auditor’s education and experience enable him or her to be knowledgeable about business
144 Case 2.4 General Motors Company
3. In retrospect, it appears that there was significant evidence suggesting that the 6.75% discount
rate was a poor choice by GM. However, as always, the information that was available in the public
domain in developing this case was certainly only a fraction of the information that was likely relied
upon by Deloitte in arriving at the decision to accept the 6.75% discount rate. So, one should be
4. Notice that a footnote to this case provides several key financial benchmarks that would be
relevant in assessing whether GM’s chosen discount rate had a material impact on its 2002 financial
statements. I think most of us would answer a resounding “yes” to that question.