General Motors (GM) has agreed to pay a $1 million fine to the U.S. Securities and Exchange Commission (SEC) to settle charges its accountants were not promptly informed of the defective ignition switches and, therefore, failed to properly assess the defect would lead to a recall. GM agreed to the penalty without admitting or denying the SEC’s charges that its faulty accounting controls prevented it from properly assessing potential losses or the impact of a recall over the ignition switch defects for more than a year, because company personnel failed to bring the defect to the attention of GM’s accountants.
SEC New York Regional Office Director Andrew M. Calamari said that GM’s internal accounting controls failed to consider relevant accounting guidance on disclosure of potential vehicle recalls. He added:
Proper consideration of loss contingencies and assessment of the need for disclosure are vital to the preparation of financial statements that conform with Generally Accepted Accounting Principles.
Generally accepted accounting principles codified in the Accounting Standards Codification require issuers to accrue for any future losses it deems are probable and can be reasonably estimated, and disclose probable losses that can’t be reasonably estimated. GM’s Warranty Group was responsible for accounting for possible losses related to vehicle recalls and other issues.
According to the SEC’s order instituting proceedings, GM’s Warranty Group was responsible for accounting for possible losses related to vehicle recalls and other issues, and would record a specific accrual for large recall campaigns costing more than $5 million whenever the recall became probable and the cost could be estimated. However, according to the SEC, the Warranty Group failed to accrue for a possible recall of GM vehicles for more than a year after engineers became aware of a possible defect in the vehicles’ ignition switches, which was later determined to cause a loss of power and prevent airbags from deploying during collisions. Sadly, General Motors knew about the defect for at least 10 years and withheld information from the National Highway Traffic Safety Administration (NHTSA) and the public.
The Warranty Group failed to accrue for the recall because it was not promptly informed of any potential safety issues, according to the order. Instead, GM’s recall process began with engineers in the automaker’s Product Investigations group, who investigated safety and compliance issues and presented their findings to GM decision makers, but did not generally communicate findings with the Warranty Group, the SEC said.
The decision makers would then escalate any issue they found significant enough to three committees, called the Field Performance Evaluation (FPE) committees, responsible for making recall decisions, according to the order. The Warranty Group was only made aware of problems and other defects when the issue was escalated to the FPE committees, as the issue was placed on an “emerging issues list” and a recall was considered probable, the order said. But the Warranty Group had no role in deciding which issues were placed on the emerging issues list, and was not consistently provided with information about potential defects before the problem was escalated to the FPE committees, according to the order.
The SEC said that GM’s engineers began reviewing claims that airbags in some models were failing to deploy in 2012, and an electrical engineer reported as early as April 2012 that the problem was likely caused by a defect in the vehicles’ ignition switches. Despite being aware of the problem, however, none of the engineers reviewing the issue informed the Warranty Group of the defect until after the ignition switch supplier confirmed that it had changed a part in the switch in October 2013, more than a year after GM personnel understood the switch presented a safety issue, the SEC said. I find it difficult to understand why any person in any official capacity at GM was not informed about the ignition switch problems at a much earlier date. Discovery in the Melton case revealed that GM knew about the defect for about 10 years.
The Warranty Group finally accrued $41 million in estimated costs for recalling three models with the switch in December 2013, according to the order. GM initiated its first recall of 619,122 vehicles in February 2014, and ultimately recalled millions of vehicles worldwide. The automaker also paid $900 million in September 2015 in a deferred prosecution agreement with the U.S. Department of Justice, and as of December 2015 GM’s ignition switch compensation fund had paid nearly $600 million to 399 eligible death and injury claims.
The Melton case mentioned above that our firm, along with Lance Cooper, handled in Georgia was the sole reason GM’s bad conduct was initially uncovered. Because of the Melton case, the recalls the MDL, and massive settlements came about. I find it difficult to comprehend how any key person at GM could not have known about a defect that was killing folks since GM knew about the defect for about 10 years prior to the Melton case and withheld the information.
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