BorgWarner has been charged with failing to report more than $700 million in future asbestos liabilities, resulting in misstatements of its financial results from 2012 to 2016.
Th disclosed that losses from future asbestos claims were probable but concluded that it could not reasonably estimate its “incurred but not reported” (IBNR) liability for those claims.
According to the U.S. Securities and Exchange Commission, BorgWarner came to that conclusion “without conducting sufficient analysis, including any substantive quantitative inquiry, despite possessing nearly 40 years of historical raw claims data.”
After an actuarial firm with asbestos claims expertise determined the IBNR asbestos liability was reasonably estimable, BorgWarner took a charge of $703.6 million to its earnings and announced in June 2018 that it would restate its financial results.
To settle the SEC’s administrative complaint, the company agreed to pay a $950,000 fine.
“Companies cannot claim an inability to reasonably estimate liabilities when the data they need to do so is available,” Carolyn Welshhans, an associate director in the Division of Enforcement, said in a news release. “BorgWarner relied on untested assumptions surrounding its asbestos-related liabilities, which ultimately led to its materially misstated financial statements.”
After its primary insurance policies were exhausted, BorgWarner became responsible in 2004 for managing its asbestos-related claims.
According to internal memos cited by the SEC, the company concluded its IBNR asbestos liability was not reasonably estimable because there was no way to accurately estimate how many people had been exposed to BorgWarner products, the incidence of illness, or the life expectancies of exposed individuals.
“BorgWarner also concluded that because its asbestos-containing clutch pads were normally sealed inside a clutch housing, BorgWarner’s position was unique among asbestos defendants, rendering industry benchmarks inapplicable for estimating BorgWarner’s IBNR asbestos liability,” the SEC said.
“These conclusions were based on high-level assumptions that were not subject to substantive quantitative analysis, actuarial assessment, or other testing,” the commission added.
As a result of Borg Warner’s financial restatements, pre-tax earnings were reduced by 6% in both 2014 and 2015 and asbestos-related liabilities increased more than 200% for each year.