The Securities and Exchange Commission has subpoenaed General Motors Corp. to produce documents related to two transactions with auto parts supplier Delphi Corp., a former GM subsidiary whose accounting practices are under investigation, GM officials said yesterday.
While GM insists it acted properly in its own accounting of the two transactions, its involvement in the probe is another bit of bad publicity at a time when the world's biggest automaker is already struggling with major financial issues and slumping sales.
"Certainly the climate for GM just now is very, very difficult, whether you're talking labor relations or government relations or supplier relations. They're having a tough time just now," said Jim Hossack, an expert at the industry consulting firm AutoPacific Inc.
The SEC, which served the subpoenas on GM on Friday, declined to comment on the investigation. A former SEC official said it's routine to seek evidence from a company that did business with the target of an investigation but added that the agency will be aggressive about pursuing charges if it concludes that GM was complicit in any wrongdoing. "Aiding and abetting the fraud of other people has been a pretty intense focus of the SEC the last three or four years," said the official, who did not want to be identified because of ongoing work related to the agency.
The SEC has been investigating Delphi since last year, and Delphi has acknowledged several problems with accounting for rebates paid to suppliers going back to 1999. GM spun off Delphi as a stand-alone company that year, hoping to make it easier for Delphi to sell its radios, safety systems, performance products and other components to other automakers.
In an SEC filing in March, Delphi disclosed that two of the transactions under review involve its former parent company. One was a $237 million payment made to GM in 2000 to settle Delphi's portion of warranty claims filed against defective products. Delphi accounted for that cost as "an adjustment to post retirement obligations" and spread it out over future years, but it should have counted it as an expense in 2000, the company said in a statement last month.
The other transaction was $85 million GM credited to Delphi in 2001. Delphi said in the statement that its audit committee is still investigating whether part of that amount was accounted for improperly.
An article in the Wall Street Journal yesterday raised questions about how GM accounted for its own role in those transactions. The company booked the $237 million payment from Delphi in the third quarter of 2000, when GM just barely beat analysts' expectations for earnings. GM did not tell investors that the Delphi payment was key to its performance that quarter, but yesterday a GM spokeswoman said the company did not have to.
The payment partially offset warranty costs that were recorded in an earlier quarter, said GM spokeswoman Toni Simonetti. It is common practice to make a supplier pay for its share of a defective product, she said, and GM properly accounted for the payment as a "reduction of recall expenses."
Similarly, the $85 million that GM credited to Delphi in 2001 did not show up in GM's accounting as a reduction in income, but Simonetti argued that it was properly accounted for as a charge to equity. The amount reflected an adjustment -- in Delphi's favor -- to the amount for which GM was liable for pensions of Delphi employees, Simonetti said.
Itzhak Sharav, an adjunct professor of accounting at Columbia University in New York, said those explanations might not be enough if investigators conclude that GM was simply maneuvering to make its quarterly results look as favorable as possible. But David B. Healy, an analyst with Burnham Securities Inc., said he expects GM to weather the investigation even as it works to improve sales and profit.
"I think it's another straw" on the proverbial camel's back, Healy said. "But I think they can take a lot more before the back breaks."