GE to Pay $200 Million to Settle SEC Accounting Probe
Securities and Exchange Commission says company failed to disclose problems in its power and insurance units
GE settled the claims without admitting or denying the SEC’s allegations.PHOTO: RICHARD DREW/ASSOCIATED PRESS
By
Dave Michaels
and
Thomas Gryta
Updated Dec. 9, 2020 9:08 pm ET
General Electric Co. agreed to pay a $200 million penalty to settle federal claims that it misled investors by failing to disclose problems in its gas-turbine power and insurance businesses, capping an investigation into what went wrong inside the conglomerate.
The Securities and Exchange Commission, after a multiyear probeinto how GE recognized some costs and profits, said the company misrepresented how its power business was making money and didn’t inform investors of the rising risk in its legacy insurance portfolio that would eventually require more than $15 billion to boost its reserves.
“GE’s repeated disclosure failures across multiple businesses materially misled investors about how it was generating reported earnings and cash growth as well as latent risks in its insurance business,” said Stephanie Avakian, director of the SEC’s Division of Enforcement.
GE settled the claims without admitting or denying the SEC’s allegations, and the settlement order didn’t allege GE violated U.S. accounting rules or the most serious antifraud laws. Under the resolution, the company also must report to the SEC for a one-year period on its policies and controls related to accounting and disclosure.
GE said no changes to prior financial statements are required. “We are pleased to have reached an agreement that puts the matter behind us,” the company said. “Under the current leadership team, we have significantly enhanced our disclosures and internal controls and are a stronger company today.”
The SEC said in announcing the deal that it continues to investigate the claims, which often means regulators are still probing whether individuals should be formally accused of wrongdoing.
The SEC said GE’s misconduct spanned from 2015 to 2017 and involved accounting maneuvers that boosted GE’s earnings by billions of dollars and improved a key measure of its cash flow. The moves to increase industrial cash flow, by about $1.9 billion in 2016 and 2017, involved selling receivables, or money GE was owed from customers, to GE Capital. The company didn’t disclose its increased reliance on selling receivables to goose its industrial cash flow, the SEC said in the settlement order.
The SEC and the Justice Department have been investigating GE’s accounting for about two years after the company disclosed large write-downs tied to its insurance business and its power business. The SEC had warned GE in September that it was preparing civil charges, and GE said it had set aside $100 million to resolve the matter.
The terms of GE’s settlement with the SEC make it less likely the Justice Department will pursue a case against GE or its former executives. Prosecutors typically have to prove knowledge and intent to commit fraud in order to indict individuals or charge a company.
Accounting problems surfaced in late 2017 as GE was struggling with declining profits and cash flow following the departure of former Chief Executive Jeff Immelt. The company later disclosed, in January 2018, that it needed to bolster its insurance reserves by $15 billion and booked a $6 billion charge.
GE’s stock tumbled in 2017 and 2018, erasing more than $200 billion in market value. The company slashed its dividend to a token penny a share. It also sold off various business units, cut jobs and twice switched leaders, installing Larry Culp as CEO in October 2018. GE also decided to change auditors after more than a century with KPMG, hiring Deloitte starting in 2021.
The SEC’s investigation found that GE executives boosted the company’s reported profits by lowering the estimated cost of fulfilling long-term GE Power service contracts. The change resulted in higher profits when the adjustment was made but didn’t bring in cash.
As the gap between reported profits and cash flow widened, Wall Street analysts and investors raised concerns, prompting GE to generate cash by selling receivables to GE’s finance division, a practice referred to as “deferred monetization.”
The practice “was described internally as a ‘drug’ because the company needed to continue to do more deferred monetization to achieve equivalent effects period after period,” according to the SEC order. The practice was also costly for GE, as it involved offering discounts to customers and paying interest to GE Capital.
Profits in GE’s power business, which was once the company’s largest in terms of revenue, tumbled after falling demand from utilities left GE stuck with excess supply of turbines and parts. GE also booked a $22 billion charge in 2018 tied to acquisitions in the unit.
The SEC said executives “misled GE’s investors about the company’s earnings quality by making it appear as if GE Power was converting earnings to cash in the present period, when in fact GE Power was pulling forward cash from future periods.” |
