GE to pay $50m to settle charges it cooked books

By Stephen Manning
Associated Press / August 5, 2009

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WASHINGTON - General Electric Co. will pay a $50 million civil penalty to settle charges by the Securities and Exchange Commission that the conglomerate used improper accounting in order to make its financial results appear more attractive to investors.

The SEC said yesterday that GE violated US securities laws four times between 2002 and 2003 when accounting for items like commercial paper funding and the sale of train locomotives and aircraft engine spare parts.

The SEC said the changes helped GE post a string of earnings reports that beat Wall Street expectations each quarter from 1995 through 2004.

“GE bent the accounting rules beyond the breaking point,’’ said Robert Khuzami, head of the SEC’s enforcement division, in a statement.

GE, based in Fairfield, Conn., does not admit to or deny the allegations, but said in a statement that it corrected its financial statements during SEC filings made between 2005 and 2008. GE said two of the violations outlined by the SEC were intentional, but that the other two were negligent errors by company officials.

An unspecified number of employees working on the locomotive transactions were fired, and GE has implemented new internal accounting controls, according to a GE spokeswoman.

“The errors at issue fell short of our standards,’’ GE said in a statement.

The SEC did not quantify how much GE gained through the accounting tactics, but the company said there was a $280 million cumulative reduction of its net earnings between 2001 and 2007 when it went back to correct the problems.

The SEC complaint, filed in federal court in Connecticut, accuses GE of four separate transgressions:

■ In January 2003, GE misapplied accounting standards to avoid reporting a $200 million pretax earnings charge related to a commercial paper funding program.

According to the SEC’s complaint, this allowed GE to avoid reporting an earnings per share figure in the 2002 fourth quarter that would have come in 1.5 cents below the consensus estimate of analysts. That would have broken eight straight years of GE’s meeting or beating Wall Street projections.

■ In 2003, GE did not correct improper accounting related to interest-rate swaps.

■ In 2002 and 2003, sales of locomotives that had not yet occurred were recorded at the end of the year, boosting revenue by $370 million.

■ In 2002, net income increased by $585 million due to an improper change in accounting for commercial aircraft engine spare parts sales.

GE said it turned over 2.9 million pages of documents and spent $200 million in legal and accounting fees over the course of the more than four-year investigation into its accounting practices.

Shares of GE rose 10 cents to close at $13.82.