The purely quantitative models used by Audit Integrity failed to screen for and subsequently eliminate the significant impact of fresh start reporting on Federal-Moguls 2008 financial results. This reporting procedure was required by US GAAP following the companys successful emergence from Chapter 11 in 2007. Five out of the 11 quantitative metrics used by Audit Integrity to evaluate Federal-Mogul were directly impacted by the significant gains, expenses and balance sheet adjustments required to be recorded under US GAAP by companies emerging from Chapter 11, including the restatement of our balance sheet to fair value and mandatory recognition of income resulting from settlement of liabilities. We find it ironic that the methodology used by Audit Integrity, which purports to predict bankruptcy risk, fails to recognize the accounting impacts of US GAAP-required fresh start reporting following emergence from bankruptcy. This constitutes a fundamental failure in the Audit Integrity model. This situation is an excellent example of why the SEC requires that companies include qualitative MD&A (Management Discussion and Analysis) in company financial reports.
A quantitative model requires accurate data mining. Audit Integritys lack of professionalism is evident because their published conclusions are based on rudimentary errors in mining publicly available financial data. Our analysis indicates that at least two of the metrics used in the Audit Integrity report on Federal-Mogul suffer from material inaccuracies in the transposition of data from Federal-Moguls public financial reports into their risk model. This points to Audit Integritys need for substantial improvements in its quality control process.
Federal-Moguls current liquidity position of $1.3 billion ($800 million in cash) and our Q3 2009 cash flow performance, the strongest for any third quarter in company history, are clear indications of the fundamental operating strength of the company. This record performance was despite the unprecedented downturn in the automotive market in 2008 and 2009. Furthermore, our independent auditors, Ernst and Young, have given Federal-Mogul a clean audit opinion on our financial reports for 2008.
–Steve Gaut, Vice President, Communications & Government Relations