According to court documents, days before GE's quarterly results were to be released in 2003, the company developed an entirely new approach that, "when applied retroactively to transactions that occurred months before, allowed GE to obtain the desired accounting results." The new approach violated GAAP, asserted the SEC. As a result, GE overstated earnings in the fourth quarter of 2002 by more than 5%, and thereby met its revised consensus EPS estimates, added the SEC in its complaint.

The fact that GE had not missed consensus estimates for the previous eight years "is signficant," Berger told CFO. "The motivation [for the accounting change] was to increase earnings."

In addition to reworking its accounting approach, the SEC charged that GE also improperly used the so-called shortcut accounting treatment for its swaps, which it was ineligible to use.

The revenue recognition schemes were a bit different, in that they enlisted the use of a middleman to allow GE to record revenue before products were sold to the end user, according to the complaint. In the fourth quarters of 2002 and 2003, GE "improperly" booked revenue of $223 million and $158 million, respectively, for six locomotives reportedly sold to financial institutions, "with the understanding that the financial institutions would resell the locomotives to GE's railroad customers in the first quarters of the subsequent fiscal years."

The idea was that GE could book the sales made to the financial institution in the current year, while they allowed their railroad customers to purchase the locomotives at their convenience some time in the future. The problem, noted the SEC, was that the six transactions were not true sales, and therefore did not qualify for revenue recognition under GAAP. Indeed, GE did not cede ownership of the trains to the financial institution. Under GAAP, revenue generally cannot be recognized on a product sale unless delivery has occurred, which means the customer has taken title and assumed the risks and rewards of ownership. In fact, the agreement with the financial institution required that GE run the locomotives in idle to prevent damage from the cold, fuel and monitor the idling locomotives, and provide security to the trains, claimed the SEC.

Asked how the SEC's investigation into GE's hedging practices resulted in a revenue recognition charge for the locomotives, Bergers said "It's not unusual for an investigation that begins looking at one thing to expand into other areas if it seems appropriate."

GE also made a critical accounting error with regard to its aircraft engine spare parts business. In March 2002, the SEC alleges that GE changed how it accounted for its sale of the spare parts in two ways. First, the company removed spare parts transactions from a model used to account for sales of aircraft engines, and that adjustment resulted in an immediate $844 million charge to revenue. Then, to offset the charge and avoid disclosing the original accounting method, "GE simultaneously made a second, related change to another accounting model," which did not comply with GAAP. In the end, "GE's error improperly overstated GE's 2002 net earnings by approximately $585 million," concluded the SEC.

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