SEC Fines GM $1M Over Accounting for Recall

General Motors has agreed to pay $1 million to settle charges that it failed to properly assess the potential impact on its financial statements of a defective ignition switch found in some vehicles.

According to the U.S. Securities and Exchange Commission, a flaw in GM’s internal accounting controls prevented its accountants from learning about the safety issue from about the spring of 2012 until the fourth quarter of 2013.

As a result, the SEC said in an administrative order, GM did not properly evaluate the likelihood of a recall occurring or the potential losses resulting from a recall of cars with the defective switch. The automaker recalled more than 600,000 vehicles with the problem, including model year 2005–2007 Chevrolet Cobalts, in February 2014.

“Internal accounting controls at General Motors failed to consider relevant accounting guidance when it came to considering disclosure of potential vehicle recalls,” Andrew M. Calamari, director of the SEC’s New York regional office, said in a news release.

“Proper consideration of loss contingencies and assessment of the need for disclosure are vital to the preparation of financial statements that conform with Generally Accepted Accounting Principles,” he added.

Under GAAP, public companies are required to assess the likelihood that a future event or events will confirm the loss or impairment of an asset or that the incurrence of a liability is remote, reasonably possible, or probable.

As early as April 2012, the SEC said, a GM engineer reported airbags in certain vehicles might not be deploying properly, because the ignition switch moved out of the “run” position.

But accountants in GM’s warranty group were not notified of the issue because, at the time, GM’s processes were focused on recall accruals and therefore generally only provided the group with information about vehicle issues at the point at which a recall was considered probable and the costs of such a recall were estimable.

“The warranty group was therefore unable to make a timely evaluation of whether certain potential recall campaigns were reasonably possible and should be considered for disclosure,” the SEC alleged.