General Motors’ March 4, 2009 filing on Form 10-K (here), among other things, reflected the doubts of the company’s auditor, Deloitte & Touche, of the company’s ability to continue as a "going concern."


The auditors, quoted in the company’s filing, said that "the corporation’s recurring losses from operations, stockholders’ deficit, and inability to generate sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern."


The company itself said in the filing that its future depends successfully executing its restructuring plan. The company said that "if we fail to do so, we will not be able to continue as a going concern and could potentially be forced to seek relief through a filing under the U.S. Bankruptcy Code."


General Motors may be the most prominent company to have been dealt a going concern opinion, but it is far from alone. Indiana-based insurer Conseco recently said (here) its auditors have doubts about its ability to continue as a going concern. Similarly, senior adult-residence developer Sunrise Senior Living also recently announced (here) that it has received a going concern opinion. Other companies that have recently announced that have received or anticipate receiving a going concern opinion include Allied Capital, Lear and UTStarcom.


The likelihood is that the number of going concern opinions will escalate in 2009. In a recent interview (here), the CEO of Grant Thornton predicted that the number of going concern opinions could hit an "all-time high" this year. Separately, he also said (here) that "we’ll see an unprecedented number of going concern footnote disclosures and clarifications from the auditors." Industries that are likely to be hard hit include automotive, residential construction, manufacturing, financial services and retail.


The problem with going concern opinions is that they can become self-fulfilling prophecies. A March 5, 2009 article entitled "The Growing Concern over Going Concern" (here), stated that "the revised status can further hinder a company on the brink of filing for Chapter 11 from avoiding bankruptcy court," because the qualification spooks "investors, suppliers and lenders."


In other words, the increase in going concern opinions could amplify the already escalating number of bankruptcies. (According to one report, here, the number of bankruptcies in February 2009 was up 29% over a year ago.)


Among other things, this likelihood of increased bankruptcies also means the potential for an increase in claims against the directors and officers of the failing companies.


A bankruptcy filing is particularly likely to be followed by claims against the bankrupt company’s directors and officers. In its recent report analyzing the 2008 securities lawsuits (about which refer here), the information database firm Advisen noted that the rising number of bankruptcies "almost certainly will be accompanied by an increase in securities lawsuits."


The Advisen Report reports that since 1995, roughly 35 percent of large public companies (defined as having more than $250 million in assets, measured in 2008 dollars) that filed for bankruptcy were also named in securities class action lawsuits. During 2007 and 2008, that percentage increased to 77 percent.


Unfortunately, an increase in bankruptcy related claims could also mean an increase in D&O coverage disputes as well. As I noted in recent post (here), D&O claims in the context of bankruptcy raise a number of recurring and potentially significant coverage issues.


In addition, a significant increase in the number of corporate bankruptcies could have a magnified impact on the D&O insurers’ loss results. In recent years, many carriers substantially supplemented their revenue by writing extensive amounts of so-called "Side A" excess insurance, which effectively operates as catastrophe insurance to provide individuals with an added layer of protection in the event of insolvency (among other things).


Up until now, the carriers’ experience on the Side A product has been overwhelmingly positive. However, a dramatic surge in corporate bankruptcy filings and the associated litigation could quickly wipe out years of earnings on this product line.


In any event, among other critical issues the directors and officers of a company facing the facing bankruptcy is the amount, structure and coverage of the company’s D&O insurance. At perhaps no other time in a company’s life cycle is it more important to the company’s directors and officers for the company to have a D&O program designed to provide them the fullest extent of insurance protection.


Accordingly, it is particularly important for senior officials of financially troubled companies to ensure that the company’s D&O insurance has been reviewed by a knowledgeable insurance professional who understands the coverage challenges bankruptcy can present.


More About GM: One of The D&O Diary’s favorite blogs, Francine McKenna’s Re: The Auditors blog, recently underwent a radical facelift. The revised site, now in beta (here), has a visually attractive new face. But even more importantly, the new design makes it even easier to access McKenna’s trenchant observations about problems in the accounting industry, and the Big 4 accounting firms in particular.


Among other things, McKenna has an interesting and detailed explication (here) of her view that aGM bankrupcy may be the least bad alternative for all concerned.


A March 5, 2009 Business Week article (here) points out that GM’s plan to try to get back to annual sales of 16 million vehicles may represent nothing so much as a failure of the company’s management to accept the reality that those kinds of sales figures in prior years represented a bubble of the same kind that ultimately overwhelmed the residential real estate market. Both were fueled by cheap credit.


In Memoriam: The professional liability insurance community has lost a good friend. Last Friday, Michael J. Stringer, of the Duane Morris firm, passed away. He was only 42. Michael was a well known and respected member of the select group of attorneys who specialize in representing carrier interests in D&O coverage matters. He will be missed.