Question

Assume you are asked as part of an audit of GE's insurance business to assess fraud risk, ehat would you include in your report and why?

Required information [The following information applies to the questions displayed below.) On January 30, 2018, General Electric (GE) announced that it was taking an after-tax charge of $6.2 billion in the December 31, 2017 financial statements and additional cash funding of $15 billion in statutory capital contributions to its insurance subsidiary. GE acknowledged a Securities and Exchange Commission investigation into the process leading to the sudden multibillion-dollar charge and an additional review of revenue recognition and controls over its long-term contracts. When GE first announced the charge on January 16, 2018, which related to the remnants of its long-term care reinsurance portfolio, CEO John Flannery told analysts he had 'underappreciated the risk in this book." (A book of business, in the context of insurance, is a database or "book" that lists all of the insurance policies the insurance company has written." GE's North America Life & Health subsidiary is a reinsurance portfolio the company held on to after mostly exiting the business between 2004 and 2006. A reinsurer buys the right to receive premiums from the primary insurers that deal directly with consumers in exchange for eventually shouldering any potential losses. Those primary insurers underwrite and administer the policies and process claims when they come in. The majority of GE Capital's remaining Insurance business. 60 percent, is related to long-term care insurance. At the time. Flannery told analysts, GE believed that a gradual runoff of existing claims - no new business has been added since 2006 -- would be more profitable than selling the whole business. Unfortunately, Flannery said, GE didn't anticipate the low Interest rate environment, low policy lapse rates, and higher claims cost that it is seeing now. GE warned analysts as long ago as the second-quarter of 2017 that a review of its claims experience and reserves was under way, and any charge would happen in the fourth quarter. In its 2017 second quarter filing with the SEC, GE wrote: "We have recently experienced elevated claim experience for a portion of our long-term care insurance products, which may result in a deficiency in reserves plus future premiums compared to future benefit payments. Should such a deficiency exist, we would record a charge to earnings in the second half of 2017 upon completion of this review." And in its third quarter 2017 filing with the SEC, GE warned about the potential charge again but with more details. "We have recently experienced elevated claim experience for a portion of our long-term care insurance contracts and are 0 This question will be sent to your instructor for grading.

Answer 1

As part of an audit of GE's insurance business to asses fraud risks , the below further analysis would be made to the report: I would analyse GE & would discovered fraud with some key points as below:

GE went out of it's way to make it impossible to analyse their performance on their business units. 2 reasons could be, a. to conceal accounting fraud, or b. because their so incompetent that they are not capable of keeping proper books & records. Each is a pathway to bankruptcy. One of overlooked could be, looking @ what dint appear on GE's financial statements but should have looked into. That which was over looked is the top line revenue & profit margin in other words all of which expenses it takes to run a legitimate business. GE would post revenue numbers for its business units & then give up their profits with no expenses listed between the top & bottom lines. Another is that: how did GE aviation's free cash flow go up so much in 2018? There could be answers to this: 1. GE aviation is using gain on sale accounting using some sort of mark to model basis. GE is fabricating its numbers. GE was caught commitment over $3.4 billion in accounting fraud while GE's long suffering shareholders paid $50 million in fines. The most common method used was revenue weighting corporate overhead & allocating those expenses in accordance to each business unit's percentage of total revenue. GE tells investors it owns a portfolio of operating companies & that it will buy & sell companies in order to assure its continued growth. Then later, they do not provide stand alone financial statements listing each business unit's expenses such that investors / outsiders interested in buying GE's businesses can properly value them. I believe that this is a wilful concealment to hide how poorly these units are really doing. It would be much easier to spin off units, sell units, value units that kept stand alone books & records yet GE doesn't do that. GE might have survived LTC if it had a competent CEO. The unwisely should have spent, 1. to pay for losses to wind down GE capital, 2. fund GE's new additional $29 billion in required LTC reserves, 3. eliminate GE's pension shortfall. The majority of what's left inside of GE capital's black box is very likely unsaleable unless GE is willing to pay billions to get someone to take these toxic liabilities off it's hands.