General Electric Co. has agreed to pay a fine of $50 million to settle civil fraud and other charges filed against it by the Securities and Exchange Commission.
The news comes on the heels of the announcement yesterday that Bank of America agreed to pay a $33 million fine to settle SEC charges that it mislead investors about $5 billion in bonuses that were being paid to Merrill Lynch executives when the bank bought it.
The SEC alleges that GE used improper accounting methods to increase its reported earnings or revenues 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. "Overly aggressive accounting can distort a company's true financial condition and mislead investors."
GE issued a statement today saying it cooperated with the SEC over the course of its investigation, and GE and its audit committee conducted their own comprehensive review.
"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," GE said. "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."
GE added that "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."
The SEC says it uncovered the accounting violations during an investigation where it found the potential misuse of hedge accounting as a possible risk area. The SEC's 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 final consensus analyst earnings per share 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:
*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.