Boston-based General Electric (GE) is defending itself against accounting fraud alleged by the same whistleblower who called out Bernard Madoff’s Ponzi scheme, Reuters reported on Monday (Aug. 19).
Fraud investigators are accusing GE of failing to set aside funds to offset $29 billion in potential insurance losses and also charge that the company did not account for profits from its subsidiary Baker Hughes, the article said.
The 175-page fraud research report also alleged that GE misrepresented its accounting, which re-ignited concerns about the company’s economic standing. GE has endured numerous financial losses and has had to take on $40 billion in charges and write-offs.
Financial investigators Harry Markopolos and John McPherson published the report on Thursday (Aug. 15). The report said GE should set aside $29 billion for insurance reserves. Markopolos is known for sounding alarms about Madoff.
GE’s reported operating margins for the past three years are a negative 6 percent, lower than the historical average. Reported GE operating margins reached 16.1 percent in 2001, the report says.
Steve Winoker, GE‘s investor relations chief, said in an email to Reuters that the company’s long-term care payouts would “play out over decades” and that GE uses “rigorous testing,” “sound actuarial analysis” and follows “regulatory and accounting” rules to estimate future payouts.
Winoker further stated that accounting rules require the company to include the subsidiary’s results in its earnings reports because it is the majority shareholder.
The allegations stem from Markopolos’ investigation into GE’s financials for an unnamed hedge fund client, which involved more than a year of probing.
“My team has spent the last seven months analyzing GE’s accounting, and we believe the $38 billion fraud we’ve come across is merely the tip of the iceberg,” Markopolos said in the report.
He also noted that the alleged fraud scheme “is going to make this company probably file for bankruptcy. WorldCom and Enron lasted about four months … we’ll see how GE goes.”