General Motors Co. will pay $1 million dollars in civil penalties as part of a settlement with the U.S. Securities and Exchange Commission. The penalty results from the SEC’s investigation into the U.S. automaker’s ignition switch recall.
The SEC determined that GM violated Section 13(b)(2)(B) of the Securities Exchange Act, which requires issuers to create and maintain sufficient internal accounting controls. In a news release, the Securities and Exchange Commission signaled that ineffective accounting controls kept GM from making proper and timely determinations if the defective ignition switches would impact their financial statements.
In recent SEC Comment Letter responses GM presented how they would approach enhancing financial reporting related to “special items” in future filings.
In response to the Staff’s comment, GM will quantify the significant components of “special items” in its narrative discussion in future filings. Set forth below is an example of how the Company will enhance its disclosure of the significant components of “special items” in future disclosures. GM identified the ignition switch recall as a “special item” explaining:
These items were excluded because of the unique events associated with the ignition switch recall. These events included the creation of the ignition switch recall compensation program, as well as various investigations, inquiries, and complaints from various constituents.
In its news release regarding the settlement with GM, the SEC circled back to accounting guidance which requires companies to assess when a likely recall could occur and to estimate a loss, or provide a statement that it is unable to make an estimate. GM has consistently reported on its ignition switch travails as far back as March 2014, including more substantive risk factor reporting in their 02/04/2015 10-K:
We are subject to legal proceedings involving various issues, including product liability lawsuits, stockholder litigation and governmental investigations, including class actions related to the Ignition Switch Recall, such as a lawsuit for the alleged diminished value of vehicles affected by the Ignition Switch Recall. Refer to the “GM North America” section of Management’s Discussion and Analysis of Financial Conditions and Results of Operations (MD&A) for additional information on the Ignition Switch Recall. At this point we are unable to predict the duration, scope, developments in, results of or consequences of the government’s investigations.
Although GM has settled with the SEC, it is likely that challenges faced in connection to the ignition switch recall will continue. Will this example of business risk spawning legal and compliance risk inform the compliance processes and best practices of fellow issuers?