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(Bloomberg Opinion) -- For General Electric Co., a true recovery “must entail a restoration of credibility and a reckoning with the tendency toward obfuscation that allowed its cash-flow and balance-sheet challenges to lurk beneath the surface for so long.” I wrote that sentence in 2019, but it could have appeared in any number of columns over the past three-plus years. And on this front, GE took a major step forward on Wednesday.
The company agreed to pay $200 million to settle a Securities and Exchange Commission charge that it misled investors about the financial circumstances leading up to its drastic drop in market value in 2017 and 2018 and painted an aggrandized picture of its material operating results. This included: failing to disclose that large chunks of the “profits” in its power division came from adjusting previous cost estimates on an accounting basis; declining to tell investors that it bolstered the cash-flow numbers for that unit by borrowing from future years and selling accounts-receivable balances to its GE Capital financial arm; and not being clear with shareholders about the risks it was taking by lowering projections for claims in a legacy long-term care insurance business at a time when the costs associated with such policies were climbing and it should have been doing the opposite. In short, GE appears to have pulled a variety of levers to make its financial statements look a lot healthier than its businesses actually were.
Nothing in the SEC’s filing should come as a surprise to observers of the company. In January 2018, GE disclosed a $15 billion shortfall in its long-term care insurance reserves. Later that year, it took a $22 billion writedown on the goodwill in its power division. The company's market value is down nearly $200 billion from what it was at the start of 2017. The SEC findings still make for some fairly brutal reading, though. “Investors are entitled to an accurate picture of a company’s material operating results,” Stephanie Avakian, director of the SEC’s division of enforcement, said in a statement. “GE’s repeated disclosure failures across multiple businesses materially misled investors about how it was generating reported earnings and cash growth as well as latent risks in its insurance business.”
GE neither admitted nor denied wrongdoing, which is fairly common for these sorts of proceedings. But the important thing for investors today is that GE isn’t the company described in this SEC order anymore.
CEO Larry Culp’s turnaround efforts are gaining traction, even amid the pandemic, with the company reporting a surprise positive free-cash-flow number for the third quarter and committing to taking in at least $2.5 billion in the fourth quarter. I’d like to see the company go further to improve accountability and transparency. Presentation “errors” that later have to be corrected, the careful micromanagement of Wall Street’s earnings expectations and GE’s continued reliance on a heavily adjusted method for calculating earnings per share haven’t made for the best look at times. But Culp has added new disclosures to the company’s annual and quarterly filings, particularly around the troublesome insurance business, and is switching to a new auditor after more than 100 years with KPMG. He’s also overhauled the board, refreshed the management team (including hiring an outside chief financial officer in Carolina Dybeck Happe) and shrunk GE’s historically bloated headquarters in favor of giving more operational control to the businesses themselves.