GE – Breaking the rules

In August of 2009, the SEC filed charges against GE alleging that it misled investors by using improper improper accounting methods to increase its reported earnings or revenues.

GE met or exceeded analysts’ earnings per share expectations every quarter from 1995 through 2004. Well I would say if a company meets or exceeds analyst’s expectations continuously for such a long time that should raise some red flags. It was found that on 4 separate occasions in 2002 and 2003, high level GE personnel approved accounting that was not in compliance with GAAP (Generally Accepted Accounting Principles).

The four different violations were:

• 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.
• A 2003 failure to correct a misapplication of financial accounting standards to certain GE interest-rate swaps.
• 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.
• 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.

Like in most other such cases, GE did not accept or deny the charges but agreed to pay $50 Million to settle.

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