Motown Going Down?

Detroit just filed for bankruptcy. Who knew?

When I’m looking into a new credit, the first place I look in the financial statements is the auditor’s opinion. Auditing is an under-appreciated art. You have to be detective and diplomat. It can be incredibly tedious until it’s not. And sometimes the audit reveals some real gems.

Like the school district in Maine that couldn’t find $230 thousand in cash. Or the New Jersey law that requires their cities and towns to report their finances contrary to generally accepted principles. And then there’s Detroit.

Their audit was audacious: 72 operational comments; 23 repeat comments, including a physical asset control system that didn’t record when something was sold. So any sale—a car, a computer—was double-counted in the books: as cash, and as an asset. The auditors found at least $3 million in double-counting.

So, yes, Detroit has economic problems and pension problems and crime problems and other issues. But at the end of the day, if you don’t have clean financials—if you don’t know where your money is—you may not have enough to pay your bills.

Douglas R. Tengdin, CFA

Chief Investment Officer

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