Remember Leslie Seidman, the former chairman of the FASB? Well, she is now, among other things, a member of General Electric’s board of directors and chairman of its audit committee. She made an appearance on CNBC on Aug. 15 to comment on the report from Madoff whistleblower and forensic accountant Harry Markopolos that accuses GE of committing a $38 billion accounting fraud.
As we mentioned last Friday, Markopolos called GE “a bigger fraud than Enron.” In his 175-page report, he accused the company of failing to take adequate reserves to cover huge current and future losses in its long-term care insurance business and violating U.S. accounting rules (the ones Seidman used to oversee) by failing to book a big writedown on its Baker Hughes GE energy unit.
The report, which culminated an investigation into GE’s accounting practices in which Markopolos was paid by an unidentified hedge fund to produce and publish, sent the company’s stock plummeting 11% on Thursday, its biggest drop since April 2008. But GE’s stock rebounded the following day after CEO Larry Culp bought nearly $2 million worth of the company’s stock. Its stock was down slightly this morning.
On CNBC’s “Squawk on the Street” Thursday morning, Markopolos said, “GE is losing $5.27 for each dollar of premium income they are taking in. Those losses are unsustainable and growing at an exponential rate. For 2018, they grew at a 60% rate. It’s growing exponentially and it’s going to make this company probably file for bankruptcy.”
So later that afternoon, on its show “Closing Bell,” CNBC had Seidman on to get her take on Markopolos’ report. Seidman, who “eats nails for breakfast,” one GE insider told Fortune magazine, did exactly what CNBC wanted her to—she put her “GAAP Expert” hat on and took a dump on the report:
“When I saw the report this morning and had a chance to just flip through it, my initial reaction was that I thought it was full of misleading, inaccurate, and inflammatory statements. That report does not reflect the GE that I know.
“I’ve been on the board for about 18 months now and I’ve been chair of the audit committee since April, and my experience of being a director at GE is that I’m working with a great team of people and a great set of director colleagues, and our No. 1 objective is to ensure the market views our financial reporting as full of integrity and that we’re providing complete and accurate financial information.
“So I think that the basis on which the report was developed is questionable at best. I don’t recognize some of the accounting practices that he describes as GAAP. Given my background at the Financial Accounting Standards Board, I’m in a unique position to know when I see somebody who understands accounting and somebody who doesn’t.”
When asked why can’t the word “fraud” be applied to GE’s accounting practices, which have been under investigation by regulators for years, Seidman said:
“Fraud is such a strong and inflammatory word, meaning intent to willfully deceive. We are in full compliance with accounting standards in the U.S. We prepare them with a rigorous process. I as the chairman of the audit committee have full access to the people and books and records at GE and I stand behind the financial reporting of this company. Speaking for my colleagues, we take this really seriously, and there is no basis for an allegation of fraud here.”
When asked if GE has its arms around the accounting for its long-term care insurance business, Seidman said:
“Yes. We have taken steps within the last year or so to bring in new talent to manage the operation. We have gone through a robust process with respect to the loss recognition test and the processes we go through to estimate the liability. As part of our normal course of operations, we’re going to be performing a current loss recognition test in the third quarter, which is a normal part of GAAP accounting. So I think we do have our arms around the accounting, and I think that the amount at which we state the reserves currently is fair and in accordance with GAAP.
“I think the report is full of opinions, and this is one of those cases where I’m not sure that the author of the report really understands the accounting in this area. We can question is it because of incompetence—he doesn’t understand the accounting standards here? Or is there some other motivation? It’s not acceptable under GAAP to just say, ‘Let’s make the liability bigger’ or ‘Let’s take the statutory basis and book it for GAAP.’ That’s not how this works.”
You can watch the full interview with Seidman below: