GE Says SEC Considers Civil Case in 3-Year-Old Accounting Probe
By Rachel Layne and David Scheer
Sept. 6 (Bloomberg) — General Electric Co. said the U.S. Securities and Exchange Commission plans to recommend a civil complaint against the company in a three-year-old probe that includes the way it recognizes revenue and presents cash flow.
“This thing could turn into something big if they find a pattern,” said Edward Ketz, an accounting professor at Pennsylvania State University, in an interview.
The SEC issued a so-called Wells notice Sept. 4, GE said in a regulatory filing after the close of U.S. markets yesterday. Wells notices typically give the recipient an opportunity to dissuade the agency from proceeding. GE, the world’s third- biggest company by market value, is in preliminary settlement discussions with the agency, spokesman Russell Wilkerson said.
The SEC probe and internal investigations have spanned the finance, aviation, health-care and energy units and led to the firing of “a few” workers at the locomotive unit, GE said last year. The probes led to restatements that the company has said reduced its profit by a net $297 million, or 3 cents a share, out of about $118 billion it earned from 2001 to 2007.
While the effect on earnings is minor considering GE’s size, the probe is “not trivial,” Ketz said.
The agency may seek to impose fines, an order barring further violations, and “other relief within the Commission’s authority,” GE said in the filing. SEC spokesman Kevin Callahan declined to comment.
“We have already disclosed these items in previously filed SEC reports, corrected our financial statements and, where necessary, implemented remedial measures,” Wilkerson said in an interview yesterday. The Wells notice is a common procedural step in an SEC investigation, Wilkerson said.
GE’s Share Slump
The investigation started in January 2005 and is one of the issues that has been overhanging GE, whose share price has declined from a 52-week high of $42.15 in October. GE had its biggest-one day stock drop since 1987 on April 11, when Chief Executive Officer Jeffrey Immelt reported an unexpected decline in first-quarter profit, citing turmoil in credit markets. He also said full-year profit would trail his earlier forecast. GE met analysts’ average estimate for the second quarter.
General Electric rose 20 cents to $28.08 at 7:58 p.m. yesterday after the regular close of New York Stock Exchange composite trading. The stock has lost about a quarter of its value this year.
“We disagree with the SEC staff with respect to this recommendation,” the filing said.
GE has restated net income twice as part of the probe and its internal investigation. The company made adjustments in the past year including in January, when it moved some profit for 2002 to subsequent years.
That disclosure, made the day GE announced fourth-quarter 2007 results in January, stemmed from accounting errors regarding profits from long-term service contracts, including its aviation spare-parts unit. The restatement cut per-share profit for 2002 by $770 million, or about 8 cents a share, with most moved into subsequent years.
Among other steps, GE has hired law firms to help in the SEC and audit issues. WilmerHale was hired to assist the company. The board’s audit committee last year hired the firm of Cravath, Swaine & Moore. GE has an internal audit staff of 420 people.
GE’s businesses include the world’s biggest providers of jet engines, power-plant turbines, medical imaging machines, private- label credit cards, aircraft lessor and locomotives. Other units include water treatment, security, appliances, real estate, mid- market company financing and vehicle rentals.
Last Updated: September 6, 2008 00:00 EDT