Ruh-roh

Is GE the new Enron?

An accounting expert who raised red flags about Bernie Madoff ’s Ponzi scheme has a new target: General Electric Co.

In a research report posted online Thursday, Harry Markopolos alleges the struggling conglomerate has masked the depths of its problems, resulting in inaccurate and fraudulent financial filings with regulators. The report, which numbers more than 170 pages and was reviewed by The Wall Street Journal, is a mixture of detailed financial analysis and sweeping claims.

Mr. Markopolos said, in an interview ahead of the report’s release, his group found GE’s insurance unit will need to bolster its reserves by $18.5 billion in cash and faulted the way the company is accounting for its oil-and-gas business. All told, he said, the accounting problems amount to $38 billion, or 40{0b837c000488b51cdb5548ae5fd7a9dd09188a2c542ead0ccc6c9432c63dc0eb} of the conglomerate’s market value….

The report claims that policy premiums paid to GE are low compared with what rivals typically receive and that GE isn’t receiving any premiums at all on more than a quarter of policies, because those contracts are considered paid in full. The group says that, even after the $15 billion boost, GE’s reserves are well below what would be expected for such a troubled group of policies. GE in the early years front-loaded gains from the long-term-care business by collecting premiums when policyholders were young, the group claims, but failed to properly record reserves as the covered population aged and claims ran at higher levels than originally expected.

As we pass the recent stock market peak and enter a new correction or bear market, a lot of fraud is going to be uncovered. This is almost certainly just the start of an ongoing series of accounting revelations.