In In Re General Motors Co., S.E.C., No. Admin. Proc. File No. 3-17797 (January 18, 2017), the Securities and Exchange Commission (the “Commission”) instituted a cease-and-desist order pursuant to Section 21C of the Securities and Exchange Act of 1934 (the “Exchange Act”) against General Motors Company (“GM”), and accepted an Offer of Settlement (“Settlement Offer”) from GM in anticipation of the cease-and-desist proceedings.  General Motors submitted the settlement offer “without admitting or denying the findings”. 

As reported by the Commission, GM’s approach to accruing estimated losses associated with vehicle recalls from the period starting in 2012 through the third quarter of 2014, included placing engineering defects recommended for recall on an “Emerging Issues List” (EIL) after review by several internal committees. Once placed on the EIL, the “potential” for a recall was considered “probable and estimable”.  The EIL  was reported to those responsible for the accounting treatment of possible losses related to potential recall actions (the “Warranty Group”).

Beginning in 2012, GM engineers began exploring claims related to a defective ignition switch (the “Defective Switch”) in GM’s line of Chevrolet Cobalts. The Warranty Group was not notified until the fourth quarter of 2013, when the Defective Switch issue finally made the Emerging Issues List. “As a result, from 2012 through the first quarter of 2014, the Warranty Group was not able to consistently consider whether a loss was “reasonably possible” under ASC 450 and for which disclosure was necessary prior to the point at which GM considered the potential field action for an accrual.”

Section 13(b)(2)(B) of the Exchange Act requires issuers to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that, among other things, transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”). ASC 450 provides guidance for the recognition and disclosure of a loss contingency, and requires issuers to assess the likelihood the future event or events will confirm the loss or impairment of an asset or the incurrence of a liability is “remote”, “reasonably possible”, or “probable”. Upon a determination of probable and estimable, “ASC 450 requires the issuer to accrue the estimated loss.” Where the loss is not subject to a reasonable estimate, disclosure is necessary.

The Commission found GM’s large recall campaigns for the period 2012 through the second quarter of 2014 violated Section 13(b)(2)(B) of the Exchange Act by not devising and maintaining a system of internal accounting controls sufficient to provide reasonable assurances that transactions were recorded as necessary to permit preparation of financial statements in conformity with GAAP.

Accordingly, the Commission, pursuant to 21C of the Exchange Act, ordered GM to cease and desist from committing or causing any further violations of Section 13(b)(2)(B). GM agreed to pay a civil money penalty in the amount of $1,000,000 to settle the proceeding.

The primary materials for this matter can be found on the DU Corporate Governance website.