Читать книгу Winning Investors Over - Baruch Lev - Страница 30

In 2009, the SEC filed a suit against General Electric, alleging that it had misreported revenues and earnings during 2002 and 2003 in order to beat analysts’ consensus earnings estimates, partially explaining a “world record.” From 1995 through 2004, GE met or exceeded the consensus estimate in practically every quarter: forty consecutive hits! The SEC alleged several manipulations, some of which, while involving millions of dollars, require an advanced accounting degree to fully comprehend. One was a plain-vanilla accelerated revenue recognition scheme. In the fourth quarters of 2002 and 2003, GE purportedly sold locomotives to financial institutions (heavy users of locomotives) to the tune of $223 million and $158 million, respectively. These transactions, the SEC alleged, were not real sales and shouldn’t have been recorded as revenue, because they were structured in a way that didn’t transfer the risk of ownership to the institutions, a GAAP requirement for revenue recognition. The financial institutions were, of course, expected to subsequently deliver the locomotives to real customers, but GE needed immediate delivery to boost fourth-quarter sales and earnings to beat the consensus estimates. GE settled the SEC’s lawsuit by paying a $50 million penalty without, as is customary in such cases, admitting to wrongdoing.¹⁵

The major lesson learned is that many manipulative schemes cannibalize future revenues and earnings, necessitating an ever-increasing intensity of trickery, soon to spiral out of control. This was evident in 2007 when GE restated its 2002 and 2003 reports for the locomotives “sales,” stating that the 2002 fourth-quarter segment revenues and profits were overstated by 8.8 percent and 14.6 percent, respectively, while the corresponding 2003 overstatements were substantially higher: 22.6 percent and 16.7 percent, respectively. This cannibalization renders most reporting manipulations unsustainable.