General Motors is paying a $1 million penalty to settle charges from the Securities and Exchange Commission that the car maker’s deficient internal controls kept it from properly assessing the potential impact on its financial statements of a defective ignition switch found in some vehicles.

The SEC announced the settlement order Wednesday related to GM’s 2014 recall of 2.6 million vehicles because of defective ignition switches that caused some drivers to lose control over their power steering and power brakes. The defect was blamed for 124 deaths and 275 injuries as of August 2015, according to the attorney who handled GM’s $625 million compensation fund for victims. In comparison to that total, GM’s settlement with the SEC over accounting control violations was relatively paltry.

General Motors assembly plant in Toluca de Lerdo, Mexico
Cesar Rodriguez/Bloomberg

The SEC noted that when loss contingencies such as a potential vehicle recall arise, the applicable accounting guidance requires companies like GM to assess the likelihood of whether the potential recall would occur. The company also needs to provide an estimate of the associated loss or range of loss or otherwise provide a statement that such an estimate cannot be made.

The SEC’s order found GM’s internal investigation involving the defective ignition switch wasn’t brought to the attention of its accountants until November 2013, even though other GM employees were aware of the safety issue in the spring of 2012. Thus, during at least an 18-month period, GM’s accountants didn’t properly evaluate the likelihood of a recall occurring, nor the potential losses that could result from a recall of vehicles with a defective ignition switch.

By 2012, GM engineers were reviewing claims that airbags were not deploying in certain vehicles over several years.

In or about early April 2012, a GM electrical engineer reported to his supervisor his view that a probable root cause of the problem was the defective switch moving out of the Run position to the Accessory or Off position. The same day, the supervisor reported this to the senior manager and a GM attorney. Around the spring 2012, certain GM personnel understood the defective switch presented a safety issue. However, the issue was not added to the Emerging Issues List at that time, so GM’s Warranty Group was not informed of it. Eventually, in February 2014, GM notified the National Highway Traffic Safety Administration it was recalling 619,122 vehicles, including 2005-2007 Chevrolet Cobalts, to repair the defective switch. The number, models and years of vehicles later rose to the millions, including the Chevy HHR, Saturn Ion, Saturn Sky, Pontiac G5 and Pontiac Solstice.

“Internal accounting controls at General Motors failed to consider relevant accounting guidance when it came to considering disclosure of potential vehicle recalls,” said Andrew M. Calamari, director of the SEC’s New York Regional Office, in a statement. “Proper consideration of loss contingencies and assessment of the need for disclosure are vital to the preparation of financial statements that conform with Generally Accepted Accounting Principles.”

GM did not admit or deny the SEC charges but nevertheless consented to the SEC’s order finding the company violated the securities laws by not devising and maintaining a sufficient system of internal accounting controls.

The SEC noted that GM made fundamental organizational changes in 2014 in its processes for investigating and deciding on potential recall campaigns. As part of those organizational changes, information needs to be provided to GM’s Warranty Group earlier in the process and separate from an Emerging Issues List, so a reasonably possible disclosure determination can be made on a timely basis.

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Michael Cohn

Michael Cohn

Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.