- The recent report by Harry Markopolos alleging fraud by General Electric is the latest in a legacy of accounting controversies the company has faced.
- Here are a few of the accounting issues GE has run into over the years, from SEC investigations to a mismanaged investment bank that cost the conglomerate $350 million.
- Watch GE trade live here.
The recent report alleging accounting fraud by General Electric marks the latest in a long history of accounting controversies within the industrial behemoth.
The company dropped as much as 14% Thursday after accounting expert and Madoff whistleblower Harry Markopolos published a report alleging fraud. The team led by Markopolos claims to have already found $38 billion in fraud, and called the sum "merely the tip of the iceberg."
GE’s CEO Lawrence Culp responded in turn, calling the report "market manipulation" and claiming Markopolos released the document for personal gain. The accounting expert stands to make millions if his claims are true, both from an undisclosed hedge fund partner that’s betting against GE and with cash rewards from a government whistleblower program.
Here’s a brief history of GE’s troubles, ranging from the recent Markopolos report to a bank’s phantom profits that cost the conglomerate $350 million.
2019: Markopolos report alleges "Enronesque" fraud
Thursday’s report alleged GE is committing fraud "bigger than Enron and WorldCom combined," with the whistleblower warning the company is "on the verge of insolvency."
The report said GE has been only providing top line revenue and bottom line profits for its businesses as part of a decades-long fraud, intentionally omitting various costs to hide damaging information.
Markopolos also claims GE changes its financial reporting formats every few years to keep analysts from comparing figures over long periods of time. He and his team focused on GE’s long-term-care insurance business and its competitors, and found GE was hiding huge losses by making false regulatory statements.
Whether Markopolos’ claims are true remains to be seen, but his previous success in uncovering Bernie Madoff’s Ponzi scheme likely played a part in sending investors away from GE.
Though the conglomerate’s stock partially recovered Friday, the report’s release may spell long-term investigation into GE’s financial reporting methods.
2018: SEC opens new probe into GE’s accounting
The Securities and Exchange Commission announced an investigation into GE’s accounting practices January 2018, focusing on a large insurance reserve increase announced in a quarterly earnings report.
The company revealed a review of its GE Capital insurance portfolio just days earlier, taking a $6.2 billion after-tax charge in the fourth quarter of 2017 and announcing it would spend $15 billion to boost reserves over a seven year period.
The SEC’s investigation prompted CFO Jamie Miller to restate GE’s 2016 and 2017 financial results.
The regulatory committee expanded the investigation in October 2018 to include a $22 billion charge GE took in the third quarter related to acquisitions for its power business.
"At the end of the day GE evokes aggressive accounting. The fact that the SEC is in there, and we know that they’ve expanded the scope of what they’re looking at, means it could lead to further expansion," Gordon Haskett analyst John Inch told CNBC at the time. "The SEC can ultimately look at anything they want."
2009: GE settles SEC lawsuit for $50 million
The SEC charged GE with accounting fraud in 2009. The company paid a $50 million settlement and neither admitted nor denied the allegations.
The lawsuit resulted from more than four years of investigation into the company’s accounting methods. It alleged GE approved non-compliant financial reporting practices four times between 2002 and 2003.
"GE bent the accounting rules beyond the breaking point," SEC enforcement division director Robert Khuzami said in a statement. "Overly aggressive accounting can distort a company’s true financial condition and mislead investors."
GE previously adjusted its accounting practices in early 2008, with the Wall Street Journal reporting the changes were an effort to end the SEC probe. At the time, the investigation already led the company to restate financial results twice and disclose three instances of accounting errors made since 2005.
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