General Electric has agreed to pay $200 million to settle a probe of its accounting practices that showed it failed to disclose problems in its power and insurance businesses.
According to the U.S. Securities and Exchange Commission, GE misled investors about how the power unit was making money and did not disclose rising insurance claim costs that would eventually force it to boost reserves by more than $15 billion.
The SEC has been investigating GE’s accounting for about two years since the company disclosed large write-downs related to the insurance and power businesses.
“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,” Stephanie Avakian, director of the SEC’s Division of Enforcement, said in a news release.
As The Wall Street Journal reports, “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.” Its stock tumbled in 2017 and 2018, erasing more than $200 billion in market value.
The SEC said in an administrative order that GE failed to disclose that more than one quarter of GE Power’s reported profits in 2016 and almost half of its reported profits in the first three quarters of 2017 resulted from reductions in estimates of the cost to complete its multiyear agreements to provide repairs and service for customers’ power turbines.
GE’s was able to report that its increased industrial cash collections were commensurate with the increased power segment profits by selling longer-term receivables to its finance division, an accounting maneuver known as “deferred monetization.”
“GE failed to disclose to investors its adoption and reliance on deferred monetization which increased present industrial cash flow at the expense of future years,” the SEC said.
The company’s insurance unit, meanwhile, allegedly lowered projected claims costs for the distant future and simultaneously concluded that it did not have insurance losses even though the costs from its long-term care insurance policies were increasing.