SEC Rewards GE Accounting Fraud

Aug 2009

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.

http://seekingalpha.com/article/153664-sec-rewards-ge-accounting-fraud