December 10, 2020

SEC Enforcement: $200 Million Settlement with GE for Misleading Disclosures

Yesterday, the SEC announced that it settled an enforcement proceeding against GE arising out of allegedly misleading disclosures in its power and insurance businesses. The SEC’s investigation had been underway at GE for the last couple of years after the company disclosed it was taking large charges in each of those business areas – here’s an excerpt from the press release:

According to the SEC’s order, GE misled investors by describing its GE Power profits without explaining that one-quarter of profits in 2016 and nearly half in the first three quarters of 2017 stemmed from reductions in its prior cost estimates. The order also finds that GE failed to tell investors that its reported increase in current industrial cash collections was coming at the expense of cash in future years and came primarily from internal receivable sales between GE Power and GE’s financial services business, GE Capital. In addition, the order finds that from 2015 to 2017, GE lowered projected costs for claims against its long-term care insurance portfolio and failed to inform investors of the corresponding uncertainties resulting from lower estimates of future insurance liabilities at a time of rising costs from long-term health insurance claims.

Without admitting or denying the SEC’s findings, GE consented to a cease-and-desist order, agreed to pay the $200 million penalty and to report for one year to the SEC regarding certain accounting and disclosure controls in its power and insurance businesses. The $200 million penalty is big, and as reported in this WSJ article, the penalty is much higher than the amount GE previously set aside to resolve the matter. Even with the settlement, the SEC’s announcement says that the investigation is ongoing, which could mean it’s determining whether to bring charges against individuals.

As noted in the WSJ, in the time since the investigation began, GE has a new CEO and, in 2021, a new auditor. In reporting the settlement, GE’s Form 8-K included this statement about its financial reporting, along with information about corrective measures the company has taken:

The SEC’s order makes no allegation that prior period financial statements were misstated. This settlement does not require corrections or restatements of GE’s previously reported financial statements, and GE stands behind its financial reporting.

GE cooperated with the SEC over the course of its investigation. As noted in the order, GE has taken a number of steps since the time periods covered by the investigation to enhance its investor disclosures regarding power and insurance trends and risks, as well as enhancing internal controls on its insurance premium deficiency testing (also known as loss recognition testing) process and adding disclosure controls and procedures concerning its insurance liabilities.

Critical Audit Matters: A Look at the S&P 100

A few weeks ago, Liz blogged about the PCAOB’s analysis of the impact of the “critical audit matter” disclosure requirement. Last week, the Center for Audit Quality issued its report with observations of CAMs contained in audit reports for large accelerated filers and it takes a deeper dive into the S&P 100. Here’s some of the findings from review of the S&P 100 audit reports:

– Average number of CAMs per audit report was 1.98

– Drivers that led to matters being a CAM appeared to include a high degree of judgment by management related to the matter that led to a high degree of auditor judgment to assess or evaluate management’s conclusions. Some CAM communications also described the audit effort and involvement of professionals with specialized skills and knowledge as principal considerations for the matter being considered a CAM.

– Of the 198 CAMs identified in audit reports for the S&P 100, 51% of them were in these 4 categories:

  • Taxes (32 CAMs)
  • Goodwill and/or intangibles (28)
  • Contingent liabilities (23)
  • Revenue (18)

The remaining 49% of CAMs were spread across 23 different categories and were less prominent from a trend perspective – business combinations, sales returns and allowances, pensions and other post-employment benefits, and asset retirement and environmental obligations were all topics that S&P 100 auditors identified as CAMs.

Transcript: “Doing Deals Remotely”

We’ve posted the transcript for the recent webcast: “Doing Deals Remotely.”

– Lynn Jokela