General Electric is paying $50 million to settle allegation that it misled investors with its financial statements in 2002 and 2003. The company notes that it neither admitted nor denied any wrongdoing, but the SEC claims GE “bent the accounting rules beyond the breaking point.”
The SEC’s complaint, filed in US District Court for the District of Connecticut, alleges that GE met or exceeded final consensus analyst earnings per share (EPS) expectations every quarter from 1995 through filing of its 2004 annual report. However, on four separate occasions in 2002 and 2003, high-level GE accounting executives or other finance personnel approved accounting that was not in compliance with Generally Accepted Accounting Principles (GAAP). In one instance, the improper accounting allowed GE to avoid missing analysts’ final consensus EPS expectations.
The four accounting violations were:
1) Beginning in January 2003, an improper application of the accounting standards to GE’s commercial paper funding program to avoid unfavorable disclosures and an estimated approximately $200 million pre-tax charge to earnings.
2) A 2003 failure to correct a misapplication of financial accounting standards to certain GE interest-rate swaps.
3) In 2002 and 2003, reported end-of-year sales of locomotives that had not yet occurred in order to accelerate more than $370 million in revenue.
4) In 2002, an improper change to GE’s accounting for sales of commercial aircraft engines’ spare parts that increased GE’s 2002 net earnings by $585 million.
“GE bent the accounting rules beyond the breaking point. Overly aggressive accounting can distort a company’s true financial condition and mislead investors,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.
“GE is committed to the highest standards of accounting. GE cooperated with the SEC over the course of its investigation, and GE and its Audit Committee conducted their own comprehensive review in conjunction with the investigation. The Company reviewed and produced approximately 2.9 million pages of e-mails and other documents to the SEC and incurred approximately $200 million in external legal and accounting expenses to ensure that all issues were addressed appropriately. We have concluded that it is in the best interests of GE and its shareholders to resolve this matter and put it behind us on the basis announced today, pursuant to which, consistent with standard SEC practice, we neither admit nor deny the SEC’s allegations. 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, as previously described in our SEC filings, including measures to strengthen our controllership and technical accounting resources and capabilities,” said a statement from General Electric.