BorgWarner Cops SEC Plea for Materially Misstating Financial Statements Concerning Asbestos Litigation

The Securities and Exchange Commission today announced settled charges against BorgWarner Inc., a motor vehicle parts maker in Auburn Hills, Michigan, for materially misstating its financial statements by failing to account for certain asbestos liabilities. The SEC’s order finds that from 2012 to 2016, BorgWarner failed to report More than $700 million in liabilities associated with future asbestos claims.

According to the SEC’s order, BorgWarner did not conduct any substantive quantitative analysis to estimate these asbestos claims, despite possessing nearly 40 years of historical raw claims data. BorgWarner also admitted that its internal controls over financial reporting were ineffective.

According to the order, BorgWarner erroneously relied on untested assumptions in concluding that it could not estimate its liabilities for these claims, including, for instance, that its products were unique among asbestos defendants and that industry benchmarks were inapplicable for purposes of calculating an estimate.

The SEC order finds that because of this accounting error, BorgWarner’s financial statements were materially misstated. As set forth in the SEC’s order, in early 2017, BorgWarner reported a charge for these claims and, in 2018, BorgWarner restated its financial statements to report the charges in the appropriate periods dating back to 2012, aggregating $703.6 million related to the asbestos claims.

“Companies cannot claim an inability to reasonably estimate liabilities when the data they need to do so is available,” said Carolyn Welshhans, Associate Director in the Division of Enforcement. “BorgWarner relied on untested assumptions surrounding its asbestos-related liabilities, which ultimately led to its materially misstated financial statements.”

The SEC’s order finds that BorgWarner violated the reporting, books and records, and internal accounting controls provisions of the federal securities laws. Without admitting or denying the order’s findings, the company agreed to pay a penalty of $950,000 and to cease and desist from future violations of these provisions.

The SEC’s investigation was conducted by Lory Stone and Rebecca Schendel Norris, under the supervision of David Estabrook, Laura B. Josephs, and Ms. Welshhans.