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August 17, 2019 | Markopolos: GE Accounting Fraud Larger than ENRON

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel (www.venablepark.com) Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog: www.jugglingdynamite.com

After a year-long investigation, renowned Madoff whistleblower and financial analyst Harry Markopolos and company have released a 175-page report to regulators declaring General Electric guitly of the largest insurance fraud ever.  The report alleges that GE has a “long history” of accounting fraud, dating back to as early as 1995 when it was run by Jack Welch.  See GE Fraud.com:

The Fraud Investigators have been researching General Electric’s financials and accounting practices for more than one year. The result is the discovery of an Enronesque business approach that has left GE on the verge of insolvency.

GE has been running a decades-long accounting fraud by only providing top-line revenue and bottom line profits for its business units and getting away with leaving out cost of goods sold,

To make it impossible to compare GE’s numbers across multi-year time periods, GE changes its Financial Statement reporting formats every few years. This is only detectable by reading at least 10 years of 10-K’s back to back. We read 17 years from 2002-2018.

The report centers around GE’s long-term care insurance unit, which the company had to boost reserves for by $15 billion last year. By examining the filings of GE’s counterparties, it alleges that GE is hiding massive losses that will only increase as policy-holders grow older.  Separately, he goes on to find issues with GE’s accounting on its oil and gas unit Baker Hughes. See:  GE shares drop after Madoff whistleblower calls it a ‘bigger fraud’ than ENRON.  Here is a direct video link.

Like so many other big companies in the last decade, GE has resorted to financial engineering tricks to boost short-term share price at the expense of longer-term investment and prudent management, as I explained here in GE: bellwether sees zero revenue growth and more buybacks:

Ironically, in continuing to buyback shares rather than pay down debt and expand long term R&D and investment plans, GE is perpetrating the self-defeating circle which is plaguing itself and other companies today. A fixation on financial engineering to keep shareholders placated in the short run, means less funds for long term investment and restructuring that will grow the productivity, innovation, and revenues of the future.

All of this could lend more momentum to proposed new laws seeking to rein in share buybacks.

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August 17th, 2019

Posted In: Juggling Dynamite

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