GENERAL ELECTRIC (GE) has built its reputation as the world’s leading conglomerate on two pillars: its ability to meet or beat analysts’ expectations every quarter, come rain or shine, and its ability to produce first-rate leaders. An embarrassing deal with the Securities and Exchange Commission (SEC) on August 4th tarnished both.
The SEC had accused GE of bending “accounting rules beyond breaking point” in order to avoid disappointing results on four occasions in 2002 and 2003. The “rule bending” boosted GE’s earnings by more than $780m and its revenues by $370m. One alleged violation involved changing the way it accounted for hedges. Another involved treating yet-to-be-completed sales of locomotives as done deals.
The sums involved were small beer for a behemoth like GE. The company, which neither admitted nor denied the charges but promised to do better in future, agreed to pay fines of $50m, a quarter of the $200m it paid in legal and accounting fees to deal with the charges. GE’s stock actually rose following the announcement, driven upwards by relief that the investigation was finally over.
But the deal nevertheless raises worrying questions about the company’s ability to “hit the numbers”—and reap rewards from the market for doing so. GE’s shares lost more than half their value last year, largely because of the poor performance of its financial services arm, GE Capital. The unit is on the mend, thanks to billions in government-guaranteed debt and the revival of asset prices. But the news that GE’s leadership was willing to bend the rules over relatively tiny sums may well disconcert investors and analysts.
The ruling was widely taken as a sign that the SEC would be more aggressive under its new head, Mary Schapiro. It issued 224 formal orders of investigation in the first six months of this year, compared with 93 a year before. It has also asked for a 20% boost to its budget. This week alone it reached a $33m settlement with Bank of America of charges that BofA had misled investors when acquiring Merrill Lynch (see article), and promised to crack down on “flash orders”, a controversial method of showing information on exchanges. Magic numbers may be harder to produce in the private sector from now on.