SEC Rewards GE Accounting Fraud

Today, GE was fined $50 million by the SEC for committing accounting fraud. The fraud goes back to 2002 and 2003 relating to the reporting of sales that hadn't taken place and the inflation of company profits. The total amount that GE was to have falsified was $995 million which means that the penalty equaled only 5.24% of the fraud committed. That penalty is like a processing fee or a sales tax rather than an actual penalty.

In theory, the fraud helped stop the decline in GE's stock price, which resulted in the doubling of the market capitalization from 2002 to 2007. It was a well known secret that GE utilized cookie jar accounting and other more questionable methods to smooth out their earnings. Such methods were not in conformity with GAAP accounting rules. However, since it was so common among companies at the time the practice was easily overlooked.

Now the SEC rides in on a white horse to tell us that they'll save the day. The SEC says that they'll charge GE with a crime that was committed over 7 years ago. What has changed in the last seven years that the SEC couldn't recognize then that they can suddenly recognize now? What the SEC is essentially doing in this instance is taking their share of the fraud and allowing GE to keep the rest.

If it were up to me I would penalize GE in an amount equal to the fraud committed plus an additional 5% of annual revenue so that there is less inducement to commit the crime again (what really happens is that GE gets better at covering up the fraud.) After all, GE will write off the fines as a cost of doing business and move on to bigger and better things. For all intents and purposes GE has been rewarded by the SEC for the crime committed.

Comments

[jeffereyf20...:]

GE cannot write-off fines for illegal acts

Aug 04 03:08 PM

[jeffereyf20...:]

If the payment is found to constitute a fine or penalty, then the purpose of the payment must be analyzed to determine whether it is punitive or remedial in nature because only punitive fines are disallowed under Section 162(f). Under the punitive versus remedial test, a payment imposed for the purpose of enforcing the law or as punishment for its violation is not deductible. Meanwhile, a payment imposed as a remedial measure — to compensate the government or another party — is deductible, even if it is labeled as a fine or penalty. (See Talley Industries, Inc. v. Commissioner, 116 F.3d 382 (9th Cir. 1997).)




On Aug 04 03:08 PM jeffereyf2003x2 wrote:

> GE cannot write-off fines for illegal acts

Aug 04 03:16 PM

[AEF:]

Anne from GE:
To be clear, GE was not fined $50M for "committing accounting fraud" as you state. The SEC is not "charging GE with a crime." It's
not a criminal case.; it was a civil charge, now settled. There have been no criminal allegations.

We agreed to settle this matter consistent with standard SEC protocol in which we neither to admit nor deny the SEC’s allegations.

Today’s announcement does not require further corrections or revisions to our financials. All issues outlined in today’s complaint have been previously corrected for in financial statements disclosed by the company.

As a whole, the cumulative net impact of the corrections on our financial statements for all prior periods in the complain as of each correction was to decrease net earnings by $280 million (or 0.24 percent) between 2001 and 2007.

Aug 04 03:45 PM

[stonebluff:]

This is an odd sort of justice. Officers at GE sin, shareholders pay the penalty. SEC knows it's hard to convict the real culprits, but also knows that what GE's people have done is shady enough that SEC can shake them down. SEC in effect extorts shareholders' money from GE, and becomes complicit in a new sin. Nobody even admits there's anything wrong! Wow!

Aug 04 04:11 PM

[update:]

We all know GE is a bad company and terrible drain on our society.

These clowns invented 'designed obsolesence' in the 50s, a model which GM amoung others would also adopt, selling products intentionally meant to fail at a specific later date.

Jack Welch invented and perfected the 'disposable worker' as a fancy way to discriminate against experienced higher paid workers and cut pension costs. That is when he was not busy cheating on his wife and writing books.

Another fancy GE innovation was the perfectly cooked books. Quarter after Quarter, year after year GE earnings matched their estimates TO THE PENNY no matter who needed to be laid off or what books needed to be falsified. That is in fact what this latest crime is about.

Then there is the massive enviromental damage that GE has ravaged upon this country, like the Hudson River fiasco.

Then lets talk about the bailouts that our socialist government forked over to GE, an endless pit of taxpayer money being shoveled into the worthless toxic asset pit we call GE. And most of that pork bailout money is funnelled through hidden and clearly illegal channels (GE as a bank holding company???), like FED 'no interest' loans which they do not deserve.

So GE controls the liberal media with their meat puppets at NBC and CNBC and they get their socialist dictator in office and all is good, right? Because now GE can pull the GREEN SCAM which we all know is the single largest rip off of man kind. The broke taxpayer can't wait to fork the pork over to GE one more time in the form of Green this and Green that.

This company stinks to the core and went bankrupt over a year ago according to their toxic asset holdings to equity ratio.

Aug 04 04:22 PM

[Path44:]

or the second day running I write to question the logic of fining America's largest companies large sums of money for the mis-deeds of their Directors & Auditors. First, Bank of America shareholders will pay the fine imposed for overpaying Merrill Lynch employees and now the battered GE Shareholders will pay another large fine out of shareholders funds for overstating their results 7 years ago. Why should GE's current shareholders be fined. The shareholders are the investment funds who will provide for all of our future retirement income. Why are the Directors & Auditors, past & present, immune from punishment whilst we pay twice, once for their inital errors and again by paying the fines

Aug 04 05:22 PM

[ebschor:]

"If it were up to me I would penalize GE in an amount equal to the fraud committed plus an additional 5% of annual revenue..."

Good thing it's not up to you.

Aug 04 10:00 PM

[LPC:]

This issue just further highlights the point that neither Keith Sherin, GE's (CFO) and Jeff Immelt, GE's (CEO) did not have control of the Company's huge financial unit from 2002 thru 2008. It remains to be seen if they know what's going on in 2009. I have no confidence in either person.

Aug 04 10:06 PM

[Donnie D:]

The sad part of this is that the settlement comes from current shareholders, who have already suffered because of their ownership of GE and many of whom did not own GE shares at the time the offense was committed. Those who benefitted most, the executives who bonused themselves on the basis of false profits get off Scott free. SEC should go after the guilty parties, not the poor suffering shareholders. I am not one of them.

Aug 04 11:30 PM

[WMBANZAI7:]

GE sure rides a higher horse than this kind of nefarious corporate behavior indicates.

Aug 05 12:59 AM

[PainfullyAware:]

On Aug 04 03:08 PM jeffereyf2003x2 wrote:

> GE cannot write-off fines for illegal acts


Yet, if the "Fine" is less than the "Profit" for nefarious deed - Who Has The Net Benefit?

Aug 05 04:10 AM

[bamanomical:]

I remember not 20 years ago ,that several senior execs at a "Fortune 500" company, were fired for "prebilling" sales in order to "make the number" It actually cost several people their careers, most of whom were sideline players, unsure of the game.
The people responsible then, had been "GE Plastics" trained. What a coincidence!

Aug 05 08:38 AM