General Electric Co. is under investigation by U.S. regulators after taking a larger-than-expected charge in its finance division, dealing a new black eye to a company once enshrined as an icon of American business.
The Securities and Exchange Commission (SEC) is looking at the accounting practices related to a review of a GE insurance business as well as “revenue recognition and controls for long-term service agreements” in the power-equipment unit, Chief Financial Officer Jamie Miller said Wednesday.
The company is cooperating fully with the inquiry, which is in the early stages, she said. Miller told analysts and investors on a conference call that she isn’t “overly concerned” about the issues under scrutiny.
The probe compounds the mess GE is sorting through after a year of management turmoil, cash-flow concerns and falling demand in key businesses such as power and locomotives. GE was the biggest loser on the Dow Jones Industrial Average last year, with a 45% tumble. Chief Executive Officer John Flannery, who took the reins in August, last week disclosed the $6.2 billion fourth-quarter charge, which is tied to old insurance policies for long-term care.
“We can’t be certain that prior management purposely misled investors, but we certainly believe there were ethical lapses that deserve attention,” Scott Davis, an analyst at Melius Research, said in a note regarding the SEC investigation. “The positive is that new management can use this as another catalyst to drive cultural change.”
The SEC declined to comment.
The shares fell 3% to $16.38 at 11:34 a.m. in New York, erasing a premarket gain of more than 5 percent. The company had advanced after it reaffirmed its 2018 profit forecast and Flannery said GE is in talks for more than 20 asset dispositions.
In disclosing the charge last week, GE said the company’s finance unit would pay $15 billion over seven years to fill a shortfall in reserves. A review of the insurance portfolio had been under way since the middle of last year.
The Boston-based company hasn’t done any new business in the long-term care insurance market since 2006. Still, it was saddled with obligations on contracts written years ago. The liabilities can swell when claims costs are higher than expected or when investment income fails to meet projections — a problem exacerbated by low interest rates.