General Electric has agreed to pay $50 million to settle Securities and Exchange Commission charges that the company reported false and misleading results in its financial statements.

The SEC alleged that GE used improper accounting methods to increase its reported earnings and avoid reporting negative financial results.

“GE bent the accounting rules beyond the breaking point,” said Robert Khuzami, director of the SEC's Division of Enforcement, in a statement. “Overly aggressive accounting can distort a company's true financial condition and mislead investors.”

The SEC uncovered the accounting violations while conducting a risk-based investigation of GE's accounting practices in which the commission identified the potential misuse of hedge accounting as a possible risk area. The SEC investigation ultimately uncovered four separate accounting violations, and GE corrected the last of the violations in 2008.

The SEC’s complaint, filed in U.S. District Court for the District of Connecticut, alleges that GE met or exceeded the earnings-per-share expectations of analysts every quarter from 1995 through the 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 GAAP. In one instance, the improper accounting allowed GE to avoid missing analysts’ final consensus EPS expectations.

Beginning in January 2003, the SEC said that GE improperly applied accounting standards to the company’s commercial paper funding program to avoid unfavorable disclosures and an estimated $200 million pre-tax charge to earnings. In 2003, the company failed to correct a misapplication of financial accounting standards to certain GE interest-rate swaps.

In 2002 and 2003, GE 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 spare parts for commercial aircraft engines increased the company’s 2002 net earnings by $585 million.

The complaint alleges that two of these errors, those relating to commercial paper hedging and rail transactions, were intentional violations of the anti-fraud provisions of the securities laws, and that the remaining two errors were negligent violations of the securities laws.

Without admitting or denying the SEC’s allegations, GE agreed to the financial penalty and consented to the entry of an order permanently enjoining it from violating the antifraud, reporting, record-keeping and internal controls provisions of the federal securities laws. The SEC took into account remedial acts taken by GE and its audit committee during the investigation, including improvements to the company’s internal audit and controllership operations.

The company reviewed and produced approximately 2.9 million pages of e-mails and other documents and incurred approximately $200 million in external legal and accounting expenses in the course of the investigation, according to GE. “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,” said the company in a 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, as previously described in our SEC filings, including measures to strengthen our controllership and technical accounting resources and capabilities.”

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access