General Electric Co will pay a $50 million civil penalty to settle charges by the U.S. Securities and Exchange Commission that it misled investors with some fraudulent accounting in 2002 and 2003.
The SEC found that the largest U.S. conglomerate had intentionally wrongly accounted for some commercial paper hedging activity and the sales of railroad locomotives, in an effort to make its financial results look better.
The world's largest maker of jet engines and electricity-producing turbines said on Tuesday it did not admit or deny wrongdoing as part of the settlement.
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.
Two other accounting irregularities, regarding how GE accounted for swap derivatives and for how it recorded profit on sales of spare parts for jet engines were negligent, but not intentional violations, the SEC found.
The news comes a day after the SEC, which got a new head in Mary Schapiro in January, reached a multimillion-dollar settlement with another major U.S. company, Bank of America Corp . The bank said it had agreed to pay $33 million to settle SEC charges that it had made false statements to investors about bonuses when it took over Merrill Lynch & Co.
The SEC said in court papers that GE had met or exceeded analysts' profit targets in every quarter from 1995 through 2004, but said that its top accountants signed off on improper decisions to make its numbers look better.
On four separate occasions in 2002 and 2003 ... high-level GE accounting executives or other finance personnel approved accounting which was not in compliance with Generally Accepted Accounting Principles (GAAP) so as to increase earnings or revenues or to avoid reporting negative financial results, the SEC said.
In one instance, the improper accounting allowed GE to avoid missing analysts' final consensus EPS expectations, the regulator said.
KPMG , GE's auditor, was not named in the court papers.
GE shares were flat at $13.72 on the New York Stock Exchange.
The company has already restated some financial statements from 2005 through 2008 and said no further restatements would be needed.
We have concluded that it is in the best interests of GE and its shareholders to resolve this matter and put it behind us, GE said 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.
In addition to the $50 million penalty, GE said it had incurred about $200 million in related legal costs.
It did cost them a quarter of a billion dollars over the years, so it is good to have it behind him, said Edward Jones capital goods analyst Matt Collins.
GE had a long streak of meeting or beating analysts' forecasts, dating back to its prior chief executive, Jack Welch. Its record broke in April 2008 when the company reported an unexpected drop in profit during the early days of the financial crisis.
Since then, GE has stopped giving Wall Street specific per-share profit targets, instead providing a framework of how it expects its individual units to perform. Collins said the era of GE's laser focus on hitting Wall Street's targets may have come to an end.
Those days are fading, Collins said. With the collapse at GE Capital and the global recession, you just don't have any levers left to pull. I think earnings quality should improve from here on.
(Reporting by Scott Malone, editing by Gerald E. McCormick, Maureen Bavdek, Leslie Gevirtz)