Question

General Electric

The GE Fraud - What happened at GE?

Why did it happen? How was it discovered?

What parts of the COSO control model do you think failed or were violated by the company?

What was or should have been the auditor's role?

What was the fallout from the fraud? Have things changed at the company?

Answer 1

A whistleblower has accused General Electric (GE) of hiding massive losses by engaging in a $38 billion accounting fraud, which is “bigger than Enron”. ... Either these eight insurance companies filed false statutory financial statements with their regulators or GE's financial statements are false, alleged the report.

GE has 106 billion in long term debt, and roughly 4 dollars a share in shareholder equity. If you take the company at its word then the ratio of debt to shareholder equity is at least 3 to 1.

106 x’s a roughly 4% interest rate means that the equity must earn at least 49 cents a share in operating cash flow over the next 12 months just to pay the interest on the long debt.

This is after taxes, before pension obligations, which is underfunded, before GE capital infusions, which needs 3 billon a year, and before insurance liabilities, which are now coming to the surface in an ugly way and growing at an exponential rate.

Thus, using the back of my hand, GE must generate a rate of rate of return on its shareholder equity capital (if there is any) of at LEAST 12.5% over the next 12 months in order to mitigate its cash burn in an environment where its most value producing asset, aviation, is going to take a 1.4 billion dollar 3rd quarter charge because of the Boeing 737 max s