Some members of the General Electric accounting staff worked hard to figure out ways to hide the negative accounting impacts of transactions booked in 2002 and 2003, according to court documents released by the Securities and Exchange Commission.
In fact, the SEC complaint relates several instances of round-robin email discussions among GE accountants, internal auditors, executives, and the company’s external auditor, KPMG, debating whether aggressive accounting would past muster with regulators.
Ultimately, it didn’t.
Today, after a four-year investigation, GE settled accounting fraud charges with the SEC for allegedly misleading investors with improper hedge accounting and revenue recognition schemes. Specifically, GE was charged with violating accounting rules when it changed its original hedge documentation to avoid recording fluctuations in the fair value of interest rates swaps, which would have dragged down the company’s reported earnings-per-share estimates.
In addition, the SEC charged GE with concocting schemes to accelerate the recognition of revenue from its locomotive and aircraft spare parts business, to make the company’s financial results appear healthier than they actually were.
Without admitting or denying guilt, GE paid a fine of $50 million, and agreed to remedial action related to internal control enhancements. “GE bent the accounting rules beyond the breaking point,” noted Robert Khuzami, director of the SEC’s Division of Enforcement, in a statement.
David P. Bergers, director of the SEC’s Boston Regional Office, which led the investigation, would not specify the number of SEC accountants and attorneys involved in the investigation, but told CFO that the agency “deployed a significant number of resources” to bring what he called “a significant case for the SEC and the Boston office” to a successful conclusion. “We will not let the size or complexity of the organization or its accounting deter us from uncovering fraud and other misconduct,” he said. “Investors have a right to rely on a company’s financial statements.”
The SEC uncovered the violations after conducting “risk-based” investigations at GE, in which the government staffers identify a potential risk in an industry or at a particular company and develop a plan to test whether the problem actually exists. In the case of GE, the SEC identified potential misuse of hedge accounting as a possible risk area.
The SEC filed its complaint in the U.S. District Court for the District of Connecticut pointing out that GE met or exceeded analysts’ consensus earnings-per-share expectations every quarter from 1995 through filing of its 2004 annual report. However, the SEC charged that during 2002 and 2003, “high-level GE accounting executives or other finance personnel approved accounting that did not comply with generally accepted accounting principles” in order to hit the EPS estimates.
GE, which is often cited for operating a corporate finance department that is second-to-none with respect to efficiency, discipline and innovation, has already adjusted its books and cleaned up its accounting as of February 2008. “We have concluded that it is in the best interests of GE and its shareholders to resolve this matter,” said company officials in a written statement. “The errors at issue fell short of our standards, and we have implemented numerous remedial actions and internal control enhancements to prevent such errors from recurring.”