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GE’S $22 BILLION CHARGE INTENSIFIES REGULATORY SCRUTINY

November 2, 2018

GE’S $22 BILLION CHARGE INTENSIFIES REGULATORY SCRUTINY

The Justice Department and the Securities and Exchange Commission are both probing GE’s accounting practices

Regulatory scrutiny may be a natural course of action as General Electric Co. recorded a multibillion-dollar write-down of assets that led to a big loss in its latest quarter.

The industrial giant misjudged how profitable its 2015 acquisition of Alstom SA’s power business would be and took a $22 billion goodwill impairment charge in the third quarter, forcing the company to post a $22.8 billion loss.

“Companies don’t write down this amount of money and not get held accountable,” said former Securities and Exchange Commission Chairman Harvey Pitt. “You have to get it right, and you start behind the eight-ball when the number is $22 billion.”

The charge is now a focus of two federal investigations into GE’s accounting. The Justice Department is conducting a criminal investigation into GE’s recent accounting practices, company finance chief Jamie Miller said on the company’s quarterly earnings call Tuesday. 

That probe is in addition to an SEC investigation launched in November. GE Chief Executive Larry Culp declined to comment on the investigations. “They will play out as they play out,” he told The Wall Street Journal.

The investigations by the Justice Department and the SEC likely will focus on examining whether GE accurately followed accounting rules and corporate law when allocating goodwill on its balance sheet and when estimating the size of the write-down, Mr. Pitt said.

“At issue will be how hard they [GE] looked at this, how diligent they were in considering whatever warnings were circulated internally and the rationale for ignoring those warnings,” he said.

GE’s impairment charge is among the biggest in recent history, according to Carla Nunes, managing director at valuation firm Duff & Phelps LLC. It is the largest such charge since oil producer ConocoPhillips’ 2008 impairment of $25.4 billion, she said.

About one-fifth of GE’s assets are goodwill, the amount companies record when they pay more than the value of hard assets in an acquisition. Companies must test goodwill once a year and record a charge for the amount that the carrying value exceeds the fair value.

There’s a temptation to recognize a large, one-time goodwill impairment charge to prevent a string of slow, regular write-downs that drag on the company’s performance quarter after quarter, said John Bautista, a principal at UHY Advisors NY Inc.

“They’d rather take the write-down all at once than having it appear that it’s continually declining,” he said.

Please click here to review the entire article originally published in The Wall Street Journal.

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