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From Products Liability Law Daily, January 19, 2017

GM sanctioned for inadequate internal controls on ignition switch recall

By Amanda Maine, J.D.

General Motors has agreed to pay a $1 million civil penalty to settle SEC charges that its internal controls were inadequate for assessing the impact on its financial statements of the possible recall of vehicles relating to a defective ignition switch first detected in 2012 (In the Matter of General Motors Co.Release No. 34-79825, January 18, 2017).

Recall. GM issued a recall notice in February 2014 (NHTSA No. 14V047) about a defective ignition switch in some of its vehicles. According to the SEC, despite issues raised by engineers and other GM personnel as early as 2012 about the faulty switch, the issue was not added to GM’s "emerging issues list." As a result, GM’s Warranty Group, which was responsible for the accounting treatment of possible losses related to potential field actions, was not notified of the defective switch.

Inadequate internal controls. The SEC alleged that under GM’s internal accounting controls, processes were focused on recall accruals and as a result, they generally only provided its Warranty Group with information about vehicle issues at the point at which a recall was considered probable. This was a deficiency in GM’s internal controls, according to the SEC, because without this information, the Warranty Group was unable to evaluate whether a possible recall campaign should be disclosed, which could impact the company’s financial statements.

Sanctions. To settle the SEC’s charges, GM agreed to pay a $1 million penalty and to cease and desist from violating the internal controls regulations of the federal securities laws. GM did not admit or deny the SEC’s findings.

In a press release announcing the action, Andrew Calamari, the director of the SEC’s New York regional office, warned that "proper consideration of loss contingencies and assessment of the need for disclosure are vital to the preparation of financial statements."

The release is No. 34-79825.

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