You are probably asking yourself why I would ask such a question, General Electric is coming back from the lows it saw during the recession. The answer is that General Electric paid a $50 million fine to the Securities and Exchange Commission last month to settle accounting fraud charges. The Judge in the case rubber stamped the deal (unlike brave and ethical Judge Rakhoff in the Bank of America case) and it was quietly reported by the media without much emphasis. As a result, the outcome is exactly what was intended: the SEC can pretend it held the company to account and the management responsible are still at the helm while the shareholders pay the fine (and paid bonuses to the same management based on fraudulent earnings). Jeffrey Immelt was appointed president and chief executive officer in 2000. The accounting fraud took place in 2002 and 2003 (why it took so long to investigage this is another story altogether). According to CFO.com, the SEC filed its complaint in the U.S. District Court for the District of Connecticut pointing out that GE met or exceeded analysts' consensus earnings-per-share expectations every quarter from 1995 through filing of its 2004 annual report. However, the SEC charged that during 2002 and 2003, "high-level GE accounting executives or other finance personnel approved accounting that did not comply with generally accepted accounting principles" in order to hit the EPS estimates. Without going into to the details (I highly recommend the article at CFO.com, for this) they used improper hedge accounting and concocted schemes to accelerate revenue recognition.
CEOs often resign in cases like this, after all they are responsible for the financial reports but I have not heard Mr. Immelt comment personally on the matter. Since the general public is really not aware of the situation due to the lack of media coverage and the SECs unwillingess to pursue management despite email trails of discussions regarding how to perpetrate the fraud, for Mr. Immelt it is business as usual. But how can investors have confidence in the results of a company who still has the same management that inflated earnings in order to mislead them? What about the those who would say that it is only the accountant's fault, the CEO cannot be expected to know this took place? The answer is that CEOs, including Mr. Immelt, are paid extremely high compensation because they have the responsibility for the company as whole. They are responsible for the financial results and how they are calculated. They must approve the financial statements as does the Board of Directors and they should be held accountable for how they were derived. They cannot have their cake and eat it too. They deserve millions of dollars in compensation because they are such great managers and have a high level of knowledge, but are incompetent when it comes to the calcualtion of their financial results, especially since revenue recognition is taught in Accounting 101.
Corporate executives need to be held accountable for their companies' actions or investing is truly like gambling as the financial results cannot be trusted to give an accurate picture of the company's financial situation. There was a very interesting academic review of 15 corporate fraud cases conducted by a group of researchers in Canada found "that generous doses of external praise can lead an egotistical executive to start to believe his or her own press, creating hubris or an exaggerated sense of self-confidence that leads CEOs to believe they can do whatever they want and get away with it....In most of these cases, these companies and the executives involved were quite present in the media or closely followed by analysts – they were market darlings, so to speak”. Mr. Immelt has been named one of the "World's Best CEOs" three times by Barron's, and since he began serving as chief executive officer, GE has been named "America's Most Admired Company" in a poll conducted by Fortune magazine and one of "The World's Most Respected Companies" in polls by Barron's and the Financial Times. Need I say more!
Good point Thank goodness Americans have a free press