Wednesday, August 26, 2009

More on GE Fraud--Locomotives on a Bridge

Additional information of GE's settlement with the SEC over bad accounting.

SEC says that in 2002 and 2003 GE booked locomotive sales before the end of their December 31 fiscal year even though they had not delivered the equipment until the next year. They arranged bridge financing in which finance companies purchased the locomotives and then resold them to GE's customers in the next quarter. This violates the “risks and rewards” guidance in revenue recognition accounting standards as the risks and rewards of ownership of the locomotives remained with GE and did not transfer to its ultimate customers.

GE promised at least one customer that it would reimburse about $4 million of tax hits that would arise using the financial intermediary. In 2002, 131 of the 191 locomotives GE originally said it sold were not actually sold. This overstated revenues and profits by more than 39%. In 2003, using the same manipulation, GE overstated revenues and profits by over 16%.

As part of the locomotive manipulation, GE asked that the financial intermediaries avoid explicitly stating in their invoices that GE was paying for the costs of storage and insurance for fear of negatively impacting GE’s revenue recognition in the quarter.