General Electric has dominated the financial news cycle over the past month. The former market bellwether is crumbing under $115 billion of debt, while its core Power business is being disrupted. Now federal investigators are questioning ex-GE staffers about accounting problems at its legacy insurance business:

The insurance business failed to internally acknowledge worsening results over the years, according to several former GE GE, -5.54% employees who said they have been interviewed by government lawyers. They described in interviews for this article examples of what they call lax managerial oversight and buried risks that ultimately kept the company from booking bigger reserves.

The investigation by the Securities and Exchange Commission started, the company said, after GE earlier this year disclosed that a shortfall in those reserves for long-term-care policies would require more than $15 billion in funding. That surprise was part of a series of problems that have pushed GE shares to their lowest levels in years and prompted GE to decide to break itself apart and oust its chief executive.

Ex-employees practically accused GE and former CEO Jeff Immelt of overstating profits and understating losses at the insurance unit. Over the past decade the company has been hellbent on propping up its share price through share buybacks and ill-timed acquisitions. Overstating profits likely helped the stock price and inured to the benefit of executives like Immelt cash in on their stock options.

The $15 billion reserve issue is related to the long-term care business currently housed at GE Capital, GE’s finance arm. The blame will either fall on Immelt or employees. This is a classic case of “Prisoner’s Dilemma.”



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