Today, the General Electric Company (GE) announced that it will pay a civil penalty of $50 million in a settlement with the Securities and Exchange Commission (SEC) over allegations of accounting improprieties. The agency alleges that GE misled investors “by reporting materially false and misleading results in its financial statements” in 2002 and 2003. These alleged distortions include increasing reported earnings or revenues and avoiding reporting negative financial results.
“GE bent the accounting rules beyond the breaking point,” said Robert Khuzami, director, Division of Enforcement, SEC. “Overly aggressive accounting can distort a company’s true financial condition and mislead investors.”
The SEC filed a complaint with the U.S. District Court for the District of Connecticut that alleges on four separate occasions, beginning in 2002 and continuing through 2003, top-level accounting or finance personnel approved the use of accounting practices that did not comply with U.S. Generally Accepted Accounting Principles (GAAP). In one alleged instance, GE improperly applied SFAS 133 to a since discontinued commercial paper funding program to avoid “unfavorable disclosures” and an estimated $200 million pre-tax charge to earnings. In another alleged instance in 2003, the company failed to correct a misapplication of financial accounting standards to interest-rate swaps, and the SEC alleges that in 2002 and 2003, the company reported end-of-year sales to accelerate more than $370 million in revenue. In the final complaint, the SEC alleges that in 2002, GE improperly made accounting changes to increase the company’s net earnings by $585 million.
The SEC alleges that the commercial paper and end-of-year revenue acceleration were intentional violations, while the other two errors were the result of negligence. The agency uncovered the alleged violations during a risk-based investigation of the company’s accounting practices.
“Every accounting decision at a company should be driven by a desire to get it right, not to achieve a particular business objective,” said David Bergers, director, Boston Regional Office, SEC. “GE misapplied the accounting rules to cast its financial results in a better light.”
GE reached the settlement, though neither admits nor denies any allegations of wrongdoing. “GE is committed to the highest standards of accounting,” the company released in a statement. “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.”
GE says that it reviewed and produced nearly three million pages of e-mails and other documents to the SEC, and suffered $200 million in external legal and accounting expenses. “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,” it said in a statement.
The company admitted that the errors that did take place fell short of its accounting standards, and in turn, has “implemented numerous remedial action and internal control enhancements to prevent such errors from recurring.” GE has already made the corrections to the effects these accounting practices would have had in its financial statements and filings to the SEC between May 2005 and February 2008 and says no further corrections will be required.
Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National.