General motors, accounting theory and receivership
General motors, accounting theory and receivership
Accounting theory is a wide ranging and comprehensive analysis and practice of management accounting and modern financial accounting. This function is accomplished through provision of a theoretical framework that assists in appreciating and understanding the purpose of various accounting practices. Business wise, the theory provides its linkage with modern accounting processes and the impacts of the procedures on business performance or operations.
The theory is preferred because it goes beyond the theory, idea and thought analysis to incorporate holistic views of the influence of cultural and historical regulations and impacts on real world business environment (Madsen, 1999, p. 12). Receivership is a scenario under which gives an order to place a property under receivers control so that preservations for affected fellows can be done through it. In a case where a company is failing, actions brought forth by its creditors can place the business under receivership. The business does not cease to operate but is subjected to receiver’s management.
In several cases, the court appoints a person to liquidate, rehabilitate, conserve or administer assets belonging to the insolvent corporation, in efforts made ultimately to relief or protect creditors. It therefore doesn’t lead to termination of corporate charter, but serves as a solution to financial difficulty. The dominion controller of the property subject to legal action is known as the receiver. In most cases, receivership is valued as an extraordinary remedy (Dubin, 1947, p. 10). This is because it is us4d to take care of a property when it is required for prosecution of lawsuit.
This is especially when a danger is perceived that the property may be removed or dissipated form the courts jurisdiction in a failure to appoint a receiver. It is a process that only takes place through a court order, utilization only in exceptional circumstances. It may involve of not the consent of the owner of the property. General Motors is a company in the United States of America, dealing with motor based accessories, facilities and equipments. It is a company that is recognized as an economy mover not only in US but also in the global economy.
However of late, the future of the company is hard to tell because it is subjected to several challenges of receivership, a process that is not only affecting its financial stability but also shaking its social fabric. United States uses a basic form of financial information in assessing the viability of corporations (Gordon, 2005, p. 17). In its capital markets, the general purpose financial statements used include profit and loss statements, balance sheets, statements of cash flows and statements of changes in equity.
The nation also obtains extra information from footnotes. The extra information may include accounting procedures and policies utilized in preparing the financial statements, composition and the nature of balances reflected in the financial documents and other disclosure and matters that may be considered relevant for fairness to be upheld in the financial documentation process. US securities registrants also make periodic, quarterly and annual fillings (Belkaoui, 1991, p. 34).
These fillings provide supplemental and additional information concerning statistical analysis, descriptions of significant risk factors, major operation locations and units, properties and plants, services and products and company’s business. The legal framework also requires operations to do with management’s discussion and analysis, assessment of liquidity risks and liquidities and certain supplementary schedules. Critical consideration and analysis of the above information gives a corporations financial status and its ability to serve the creditors and satisfy the requirements by the law (Cheffins, 1997, p.
15). The question on whether General Motors is in full consideration of ethical aspects in the process of receivership is subject to various influences. To some point, it may be ethical and fail at some points. This is because the receivership process has got some benefits to both the company itself and the shareholders, meaning that the process may lead to ethical grounds of treatment. On the other hand, the process has its own disadvantages to itself and stakeholders, this representing the degree of ethical deviation.
For the time being, the company has received a mounting pressure to convince Washington that the bankruptcy of the company does not turn out catastrophically to the national economy. It is anticipated that if this happens, millions of job opportunities will be lost, tax payers will have to pay more than $100 billion and therefore lead the economy into a severe depression. Because of this threat, Barrack Obama, Harry Reed and Nancy Pelosi have called for an auto bailout of the company (Rae, 1959, p. 16). The decision to get into a receivership supports the argument that the company is ethical to some extend.
This is because receivership is the alternative of bankruptcy which is worse. Bankruptcy paralyses every thing in a company and soils the continuity of the company, stakeholders and the national economy as a whole. Surrendering to receivership deal is showing the concern of the company towards their stakeholders, national economy and the global economy. In one special consideration, if the company failed to engage in a receivership deal, all dealers and suppliers from all over the globe would be jobless (Bonbright, 1982, p. 19).
To escape from employee assaults, receivership make sure all employees are not pay off and the operations of the company continue running though under courts monitory. The control by court gives hope and protects the rights of the stakeholders. Reflecting unemployment as a worldwide challenge, it cloud be bad for companies to advocate and engage in business strategies that increase unemployment. Again, the business ethics are tied to respect and compensation of employees as a major priority, because it is believed they form the production propellers.
Without employees, an organization can hardly run and this is the reason as to why General Motors has been regarded as ethical for giving employees the best treat the company could afford during this financial challenge (Gordon, 2005, p. 17). If General Motors could not strike this deal, it is a possibility that it would have broken up and sold to other companies that may be foreign or domestic. In this case, stakeholders would have lost everything, workers would have lost and management fired.
This is a clear indication that receivership is attributed to less stigma. The decision of rushing to this line of management has been seen to release the stigma of the management, country and the clients in question. This is because the operations are still on and under strict surveillance by court administration (Gordon, 2005, p. 16). Therefore, America as a nation, its citizens and stakeholders still have hopes that the company will reinstall its functioning. According to the accounting theory, it is always advisable to be a risk taker but to certain limits.
Once the balancing of the accounting section fails, it is also provided that accountants or administration should surrender and allow advanced cross data analysis. This is a measure made to minimize the exposure to risks that may render an organization non functional. Business receivership increases chances of a troubled business survival. To revive the proceedings of the business almost to normalcy level, it is essential to put in place new management to help discover the errors of the old management. This increases the probability of the business survival (Bonbright, 1982, p. 19).
The reason as to why many people may believe that GM is not serving its function and failing is because the American economy itself is under its steepest drop in 20 years time, recording foreclosures at highest levels, stock market performing the poorest for five years and a decaying consumer confidence. It should be understood that the cause of the GMs challenge is also contributed to by the economic environment of the country and also the global economy, which is in a recession. It is said that General Motors is in the verge of bankruptcy. In December 2008, the consumer confidence in the company has dropped to its lowest levels possible.
Because of these difficulties, the federal government announced that the economy has been in a recession as from December 2007. This company applied for this protection from creditors because according to how the situation was, a red ink had mounted an issue which was realized through a cash flow collapse and amid falling sales. The company made the unavoidable choice in efforts of filing court intervention in dealing with urgent liquidity crisis and therefore seeks for transformation towards sustainability. According to the stock market, the company’s shares had dropped with nearly 85 percent and were in turn suspended.
The company was unable to meet its payroll in December 2008. GM is observed to have small domestic rivals but its state is closely being watched to face amid turmoil in auto industry. The failure of this company has also been ignited by the global financial crisis that has plunged the demand for vehicles (Rae, 1959, p. 17). According to the nature of accounting, it is described as a process of communicating, measuring and identifying economic information to facilitate decisions by the information users and permit informed judgments to take place.
This has been taken as a statement of basic accounting theory, supporting the ideology that economy or entrepreneurial progress is a concern of stakeholders, and information should be exposed with a lot of freedom and accuracy. In regards to the General Motors, the move to receivership is a strategy to allow access to documents and pave way for new judgments to be made but separate entities. This is highly appreciated in the theory of accounting because it improves the creativity of the company in management activities and help reconstruction of the company. Failure to communicate information is not ethical.
This is because if GM was not ethical it could only give up at times of complete insolvency or bankruptcy. Under the accounting theory, measuring and communicating information involves observation of events and transactions of the firm and measuring the transactions as well. Financial report is then released, which serves as a message to help the healing process. After the interpretation of the message, an image of the firm is obtained and then used as a basis of decision making. The adjustments that are possible in case of the above company will be based on accounting discoveries and recommendations.
The allowance of experts into the scrutiny process is a show of responsiveness to the reform process and the willingness to be corrected (Rae, 1959, p. 17). As the above takes place, the receiver has acted as the referee of the proceedings, playing a trustee duty to the court. This receiver has maximized the value of General Motors Company and its assets. The receiver is also taking the best ways possible to protect shareholders and creditors involved in the saga of this company. With time, the receiver may often liquidate the assets and shut it down but this is not the case in the united stases of America.
The fate of the company therefore rests on the possibility of the company coming back operation, the amount of remaining money and the causes of the business problems. If events prove that there is no hope for the company in the long run, the acting receiver would make sure that every partner involved benefits from the scrape value of the venture. If it is finally ruled the company should be sold as a going concern, the price tag can improved because for the value added by the receiver. This description makes receivership of its concern more sensitive to its creditors, clients and creditors (Bonbright, 1982, p.
18). With all the above arguments describing General Motors as ethical, the path that the company followed to this far is on the other hand questionable both in human resource management and financial accounting. If the company was so ethical, such difficulties could be detected earlier and protected. It will be then very accurate that the company should have participated in financial fraud. Fraudulence and material misstatement is believed to have led the company to this saga, completely going against accounting ethics of transparency, accuracy and accountability.
At international levels, the company is said to have defied from accounting theory by either overstating revenues, understating expenses, omitting some liabilities, overstating assets, failure in transactions, disclosure and accounting events, mischaracterization, disclosures that may be misleading in concerns of MD&A, products and services, liquidity and liquidity risks or in supplemental information. Inclusively, the country may also have created fictitious assets, omitted actual liabilities or improper reflect of transactional timing.
The above frauds are all outlawed in the financial accounting theory, which the above company may not have adhered to, leading to the present massacre (Rae, 1959, p. 16). Still to show discontentment of the company as far as accounting theory is concerned, receivables and revenues recognized prematurely should be given a special treatment in the accounting process, an error that General Motor sis believed to have committed and thus failed to meet its payroll in December 2008. The cost of production of the company has been observed to increase before the fall magnified and collapsed the functioning of the company.
Through accounting theory, this may have been caused by deferring the reconnection of costs or purchases, improperly overstating the value of inventories or improper treatment of overhead or indirect expenses. According to the outcry of the General Motor employees, there must have been a delayed recognition of associated provision expenses before this downfall. Contingencies have been detected in form of litigation reserves, product and warranty liability reserves sales return allowances and doubtful accounts allowances.
According to the nature of the controversy in the company’s financial statements, creation of fictitious probably took place. It involved recording of associated fictitious receivables, fictitious revenues, fictitious inventory and therefore underestimation of cost of goods sold (Madsen, 1999, p. 13). Accounting theory and practice of accountants firmly argue against exclusive frauds, which definitely drive corporations and businesses to the situations comparable to the ones of General Motors.
The exclusion concerns liabilities and other obligations such as contingencies, guarantees and commitments, all of which affect the balance sheet status. The effect of such exclusions is understatement of expenses such as environment cleanup expenses, litigation expense provisions, judgment liabilities, litigation reserves debt losses such as undisclosed commitments, guarantees and debt related contingencies. This category also incorporates direct charge off reserves and impairment of unconsolidated assets like partnerships, joint ventures and equity investments.
All the above exclusive frauds lead to overstatement of liquidity measures and understatement of company’s total liabilities and interest expense (Dubin, 1947, p. 11). As far as accounting theory is concerned, the company is believed to have defied the provisions of the theory with big margins. This is because if the company had carefully taken into concern the above errors, the turmoil could not have resulted. Again, even if it could occur, the margin could not be alarming. The accounting discrepancies that many leaders in America have felt brought the company down are pushing them to propose a complete turmoil of the company.
The above fraud description illustrates that receivership of the company was not the best precautionary measure to take, but instead accounting theory prescriptions should consistently have been upheld by the company and thus prevent this fall. This means that the company is not as ethical as people may be thinking. Ethics are attributes in which every member of a certain setting performs or delivers his or her responsibility with all affordable sincerity and fairness. This involves consideration of the cultural expectations when in such environment, social aspects and the particular work ethics.
If frauds comparable to the ones above take place, this means that a section of the staff is not sincere and so non ethical. Therefore it may also make sense to say the company is not so ethical (Belkaoui, 1991, p. 35). To add on this, an ethical institution is always the interest of the public because of the confidence they attach to them. The subsequent and rapid drop in the confidence of this company is an indication that it wasn’t an ethical organization which citizens could understand the scenario as a normal challenge and therefore continue supporting it.
Because receivership is a lame way of solving the problem, the structural framework has to be strengthened if the company happens to revive as a going concern. If efforts to revive the company fail, it would also be wise to go for the bankruptcy option. Together with the disadvantages of this option, it may ultimately emerge as stronger form with lower cost structure. To supplement this, the government can undertake a bailout to add new capital, replace management, write down the debt and preserve most of the jobs.
To conclude, receivership of General Motors can not be seen as a solution as per now but it is time to tell, especially according the economic trends. Still, it is hard to tell whether the company is ethical, since it posses both weak and strong elements of ethical practices (Cheffins, 1997, p. 15). Bibliography Belkaoui Ahmed (1991). Accounting in the dual economy. Westport, CT: Quorum Books; pp. 34,35. Bonbright James (1982). The holding company: Its public significance and its regulation. New York: McGraw Hill Books; pp. 18,19. Cheffins Brian (1997).
Company law: Theory, structure and operation. New York: Clarendon Press, Clarendon; pp. 15. Dubin Robert (1947). United automobile (CIO), general motors and Studebaker. Science Research Associates; United States, pp. 10, 11. Gordon Robert (2005). Business leadership in the large corporation. New York: Brookings Institution; pp. 16,17. Madsen Axel (1999). The deal maker: How William C. Durant made general motors. New York: John Wiley & sons; pp. 12, 13. Rae John (1959). American automobile manufacturers: The first forty years. Chilton, Washington; pp. 16, 17.
Subject: General Motors,
University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 28 September 2016
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