venerdì 4 novembre 2011
GE's SEC Settlement
Finance & Accounting
Legal & Regulatory
Risk & Compliance
Insights & Education
GE's SEC Settlement Resources Global Professionals Finance & Accounting Blog Tuesday, August 18. 2009 GE's SEC Settlement Earlier this month, General Electric announced that it had settled a long investigation with the SEC. They incurred a $50 million fine - but also incurred about $200 million in legal fees. Not to mention - the bad publicity associated with this type of thing. The investigation was launched several years ago - when GE restated it's results for improper hedge accounting and revenue recognition. These are two of the most complex areas in accounting. In fact, GE has had several restatements associated with misapplying FAS 133, the hedge accounting standard that numbers over 800 pages. (Tammy Whitehouse of Compliance Week wrote a great post-mortem on this recently.) As I followed this investigation over the years (beginning with the initial restatement) - a few things occurred to me.
1) The restatements appeared to have been immaterial - I wonder if any investor would have actually made a decision to buy/sell based on the results that were only slightly different after the restatement?
2) The infractions appear to have taken place at subs of GE - most corporate accounting policy teams in large companies do not review EVERY single transaction in the company. It would not be cost/beneficial. There are usually parameters (dollar amount, risk, etc.) that would require corporate approval and sign off - I don't know if this was the case at GE - but I wonder based on the immateriality of these transactions whether they would have gone to most corporate teams in most large companies?
3) The complexity of US GAAP standards, like FAS 133, are part of the problem here. These standards are so rules-driven and complicated, with many interpretations, that it is almost impossible to know how to apply them exactly to transactions.
4) If we had been using IFRS in the US - I wonder whether the accounting actually applied by GE may have been acceptable? Since more judgment is permitted based on the substance of the transaction - this may have been a non-event under IFRS. While some may point to this as a flaw in IFRS - I think it is just the opposite. If I was a shareholder of GE, I would be outraged that the investigation not only caused years of distraction for the company, but also cost the company at least $250 million in fees, for what appears to have been an immaterial difference to the totality of GE. To me, the distraction to me, is far more costly than the misapplication itself.