As is customary in such settlements, G.E. neither admitted nor denied the charges. But it sounded contrite. “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,” said a company statement.
Another view of G.E.’s accounting standards emerged a few years ago in a book written by a man who worked there for six years in the early 1980s, before concluding the corporate life was not for him and entering a seminary. James Martin may be the only Jesuit priest with a degree from the Wharton School of the University of Pennsylvania.
“The primary task of my first job was to issue very long, monthly statistical reports,” he wrote in his book, “In Good Company: The Fast Track From the Corporate World to Poverty, Chastity and Obedience.” “The first month,” he recalled, “I informed one executive that our results were coming in low” because of losses in overseas operations.
“So what?” replied the executive. “Just reverse a few journal entries.” Corporate headquarters, he explained, would come down hard on them if they missed the numbers.
Another boss told him he was “taking those accounting courses way too seriously.”
The S.E.C. complaint makes it sound as if those days came back, assuming they ever left. It tells of corporate accountants discovering misstatements and secret side deals, and of more senior executives telling them to sign off on the books anyway. It outlines four separate violations, two of which it says descended to the level of fraud.
It is notable how this investigation came to be. Post-Enron, the commission used its authority to look at G.E.’s books to figure out whether there were violations in the area of so-called hedge accounting, which determines whether companies can avoid reporting profits and losses from a variety of derivative securities.
The commission evidently found three violations, two in hedge accounting and the other in an Enronesque scheme to inflate profits with fake sales.
“It was like peeling an onion,” said David P. Bergers, the director of the Boston office of the S.E.C., as one accounting issue led to another.
The fourth violation appears to have been reported by G.E. All have been fixed in restatements.
While it may seem odd to view the government as an underdog, it was. G.E. says it spent $200 million on outside lawyers and accountants in dealing with the investigation. By contrast, the S.E.C.’s entire annual enforcement budget, spread over thousands of inquiries and investigations, was less than $300 million when this investigation began in 2005.
You can be sure that G.E. spent a lot of time arguing that the amounts involved, only a few hundred million per violation, were not really material to a company its size.
There may be more to come. The S.E.C. said that its investigation of G.E. was over, but it did not say that about any of the accounting officials at the company, or any of the people at KPMG, G.E.’s longtime auditor.
KPMG’s role is interesting. The complaint indicates that unnamed accounting officials at G.E. failed to provide important information to KPMG, but G.E. says that information was later given to the auditors.
The S.E.C. filing says that on one of the hedge accounting issues, the KPMG auditors consulted the accounting firm’s national office. But when push came to shove, and the question was whether to approve accounting that the S.E.C. now says was clearly wrong, the local auditors signed off without telling the national office what was going on. Could it be that the local auditor feared the national office experts would have backbone, and force him to anger a very important client?
A KPMG spokesman declined to discuss any aspect of the case.
This all took place in January 2003, days before G.E. was to announce its annual profits for 2002, Jeff Immelt’s first full year as chief executive. Had G.E. not fudged the accounting, it would have missed its profit forecast by $200 million. Not since 1994 had G.E. failed to make the numbers.
You may recall something similar happened at Arthur Andersen when it was auditing Enron. In that case, the local auditors chose to ignore the national office.