You are the chief financial officer of General Motors Corporation (GM) at the beginning of 2009. The company’s board of directors has asked you to inform board’s audit committee about the pending audit opinion of Deloitte and Touche, LLP. The audit committee, in turn, will report to the board about the findings of GM’s external audit firm.

The independent audit opinion contains both good news and bad news: Deloitte and Touche believe that GM’s financial statements conformed to generally accepted accounting principles. On the other hand, the audit firm expresses concern about the automaker’s ability to continue as a viable economic entity (going concern). The relevant information from the pending audit opinion is as follows:

In our opinion, such consolidated financial statements present fairly in all material respects, the financial position of General Motors Corporation and subsidiaries at December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements for the year have been prepared assuming that the Corporation will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Corporation’s recurring losses from operations, stockholders’ deficit, and inability to generate sufficient cash flow to meet its obligations and sustain operations raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The auditors’ explanatory paragraph independently verified GM’s grave financial situation. As CFO, you note that the firm has

totaled $71 billion of net losses from 2006 through 2008.

a retained deficit of $86 billion as of December 31, 2008.

used more than $12 billion in cash from operating activities than it generated in 2008.

These distressing financial figures enumerate GM’s poor performance over many decades. The causes that produced these results are varied and numerous. Without affixing blame, you recall GM’s:

Inability to protect market share

Lack of product innovations

Deficient product quality

Bloated cost structure

Ineffective management

As the audit report alludes, GM now teeters on the verge of bankruptcy. Although your charge is to inform the audit committee about the pending audit opinion, you are sure that they will engage you about the larger financial crisis facing the company. You know that the audit committee will seek information about the possibility of the firm filing for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. This filing would allow the courts to supervise GM’s reorganization and reemergence into the marketplace.

You review the critical items that would happen under bankruptcy. Foremost among the positive aspects of bankruptcy protection is that GM would have the opportunity to void contracts and renegotiate debt obligations. Bankruptcy would allow the company to eliminate onerous labor contracts, which place it at competitive disadvantage. The firm could then establish a wage structure equivalent to other car manufacturers. GM could also reduce its huge retirement benefit obligations. Legacy costs for pension payments and health benefits to former employees have long consumed substantial amounts of company cash. GM could also shutter non-productive plants and cancel long-term leases. The court would also make creditors negotiate existing debt obligations. This would result in the firm settling many financial obligations for pennies on the dollar, or converting debt into equity stakes of the restructured firm.

You also contemplate the disadvantages to bankruptcy protection as well. The court-appointed bankruptcy trustee would have to approve all major corporate decisions. Thus, the judiciary, rather than management, would effectively run the firm during bankruptcy proceedings. In addition, bankruptcy would increase administrative costs substantially. General Motors would have to pay for the legion of attorneys, accountants, and other consultants assisting in the corporate restructuring.

Market reaction to a bankruptcy filing by GM has more serious consequences than loss of managerial autonomy and increased administrative costs in your opinion. You assess whether consumers will lose trust in the firm’s ability to deliver vehicles, service them, and honor warranties. If customers desert the firm in substantial numbers, then you worry that the bankruptcy reorganization will become a corporate liquidation.

Required: Prepare an opening statement of no longer than one-page to the audit committee. In addition to your opening statement, anticipate three questions that the committee will ask you and draft your responses to them.