General Electric: The Earnings, Cash and Insurance Risks Investors Could Not See

General Electric paid a $200 million civil penalty from the Securities and Exchange Commission in the power and insurance disclosures case over allegations that investors received a misleading picture of earnings, cash collections and insurance risk. The SEC said GE left out how much power-business profit came from lower cost estimates, how internal receivable sales increased reported industrial cash collections, and what lower insurance-liability estimates meant while claim costs were rising. If you worked on those estimates or transfers, the difference between the internal explanation and the public one is the heart of this case.

GE’s case follows the information the agency alleged was missing from its reports to investors. The broader problem of reserve estimates and omitted losses reaches other businesses, but here the SEC connected disclosure failures across GE Power and the company’s insurance operations. A power-business analyst and an insurance finance analyst could recognize different parts of the same reporting problem.

What Did GE’s Power Earnings Depend On?

According to the Securities and Exchange Commission’s December 9, 2020 announcement, reductions in prior cost estimates accounted for one-quarter of GE Power’s profits in 2016 and nearly half in the first three quarters of 2017. The SEC alleged that GE described those profits without explaining that dependence. Investors saw the earnings result without the explanation of how much came from changing an earlier estimate.

The estimate’s earlier version, its revision and the resulting accounting entry let us examine how a changed assumption reached reported profit. The disclosure draft then shows what investors were told about that change. An employee working on the estimate may know what changed, when it changed and who reviewed it.

In its Dell enforcement announcement, the Securities and Exchange Commission alleged that surplus reserves were used to cover operating shortfalls. GE’s power allegations concerned reductions in prior cost estimates. In each account, an insider’s knowledge of the adjustment helps explain what the earnings figure alone leaves out.

How Did Internal Receivable Sales Change GE’s Cash Story?

The SEC alleged that GE’s reported increase in current industrial cash collections came primarily from internal receivable sales between GE Power and GE Capital, its financial services business. It also said that the increase came at the expense of cash in future years. The alleged omission concerned both where the current cash came from and what that meant for later collections.

The cash question is who supplied the money, and when. Here, the SEC identified a transaction between businesses inside GE as the principal source of the reported increase. In the SEC’s account, GE brought the cash forward and left the explanation behind.

For a finance employee who knows similar transactions, the useful comparison is the receivable schedule against the transfer entries, payment dates and public cash explanation. We would examine which receivables were involved, how the transfer appeared in the books and which period’s collections the disclosure described. Someone who worked on the reconciliation may be able to explain why an apparent improvement depended on moving cash forward.

The accounting literature treats receivables and earnings as connected evidence. The 2019 paper Accounting Fraud: A Literature Review, published in Risk Governance and Control: Financial Markets & Institutions, describes an earnings-manipulation screening model that considers sales growth, days’ sales in receivables and accruals among its inputs. For someone who worked on GE’s internal receivable sales, the connection is concrete: the amounts owed, the transfer and the cash figure investors saw. The insider can explain the transaction behind a relationship that a financial ratio only flags.

What Did GE Leave Out About Long-Term-Care Insurance Risk?

The Securities and Exchange Commission alleged that GE lowered projected claim costs for its long-term-care insurance portfolio from 2015 to 2017 without telling investors about the corresponding uncertainty in its lower estimates of future insurance liabilities. The agency said long-term health-insurance claim costs were rising at the time. Its allegation concerned the picture of future obligations investors received while those estimates were moving in the other direction.

For an insurance finance analyst, the relevant comparison is between the claims information available at the time and the assumptions used to project future costs. We would examine the estimate versions, the reasons for revisions and the review of the resulting liability. The risk disclosure belongs beside those records because the SEC’s allegation concerns what the company told investors about the uncertainty in that calculation.

An analyst may know why an assumption changed even when the public disclosure gives only the resulting number. A reviewer may know that a question about the claims experience reached management before a statement went out. Those are the kinds of connections we examine with someone who worked on the estimates: the information available, the decision made and the explanation that reached investors.

What Did the SEC Resolution Require?

The Securities and Exchange Commission charged GE with misleading investors and failures in its reporting, disclosure checks and accounting controls. GE agreed to avoid future violations and to report to the agency for one year about specified accounting and disclosure controls in its power and insurance businesses. We would call that an expensive way to admit nothing.

The agency reported that GE’s stock price fell almost 75% during 2017 and 2018 as challenges in the power and insurance businesses became public. Its account of the investor fund confirms that GE paid the penalty and that the money entered a Fair Fund created for harmed investors.

What Can a Power or Insurance Finance Insider Show?

An insider can connect a published result to the estimate, transaction or review that produced it. For GE’s alleged power-earnings problem, that connection runs through the cost-estimate revision. For the cash disclosure, it runs through the internal receivable sale and its effect on later collections. For the insurance disclosure, it runs through the claim-cost projection and the uncertainty that investors were not told about.

That makes the records behind the number more useful than another copy of the published result. We examine the earlier and later versions with the person who understands the work, then connect them to the entry, approval and public statement. A disclosure reviewer may hold a different part of that account from the analyst who prepared the calculation.

The SEC whistleblower program can pay whistleblowers 10% to 30% of qualifying sanctions collected in an action with monetary sanctions exceeding $1 million. If your concern is reporting a similar disclosure problem, our work starts with what you know about the estimates and transactions. We bring that business knowledge together with securities fraud whistleblower lawyers who understand financial reporting and the SEC program. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. If the same numbers also concern fraud against government money, speak with us about that connection.

You Know Why the Estimate Changed

If you saw a cost estimate, receivable transfer or insurance projection tell a different story from the investor disclosure, speak with our whistleblower experts about what changed. We build the case around the decisions you understand, bring in securities fraud whistleblower lawyers who understand the estimates and transactions at issue, and stay beside you to pursue your strongest securities whistleblower case.