Randall Smith, Steven Lipin and Amal Kumar

• The article has delved on how General Electric manages its earnings. There is the inclusion of varied insights regarding the issue from the company’s executives and varied financial analysts.
• The article outlines that despite the prospect of making a $750 million loss and after-tax charges, the expectation is that it will not dent the company’s smooth and consistent earnings growth.
• General Electric’s earnings have been on the rise in the past decade despite there being a fall in the net income in 1991 and 1993 due to some accounting changes on post-retirement benefits.
• Earnings management is among the ways that the company uses to achieve success given that it is involved in numerous cyclical businesses.
• General Electric tends to offset one-time gains from the sale of big assets coupled with restructuring charges to smooth out fluctuations. This technique ensures that profits do not rise too high, to the extent where they cannot be topped in the year that follows.
• GE is regarded to prize consistent growth since it has numerous businesses that make it difficult for analysts to track them all.
• The clearest way that the company manages earnings is by restructuring charges. GE takes an offsetting restructuring charge when it sells a business for profit or makes an unusual gain. Mr. Sankey asserts that this strategy makes it possible for the company to “transmute” one-time gains to future operating income. This ensures that the company reports steady growth to investors every year.
• General Electric also manages earnings by buying them. This is done by acquiring assets or companies that become profitable immediately since they throw off more income compared to GE’s cost of financing.
• According to Sanjay Sharma, the biggest business risk for the company comes from the management’s ambitious growth targets.
• Richard Schmidt believes that General Electric makes it difficult for analysts to monitor its operations since it discloses scant information compared to the array of information that is available regarding its parent company. A good example is where the company does not differentiate income from asset sales.
• Howard Schilit and Peter Wilson seem to disagree on whether earnings management is a good or a bad thing.

Questions

1. Mr. Dammerman does not seem ready to discuss whether General Electric Indulges in earnings management. In your opinion, do you think offsetting one-time gains with one-time charges could be considered as earnings management? Why?
2. In your opinion, do you think the concept of earnings management is a good or a bad thing for a company? Why?
3. In your opinion, when could earnings management be regarded as being a case of fraud?

Answers

1. Yes. This is because offsetting one-time gains works in a way that helps to smooth the profit growth. This tactic tends to create something artificial that is not in existence as of that time.
2. I think that earnings management is a bad thing. This is because the practice tends to erode the confidence that the public has in the financial reporting process. There are some management executives that abuse the afforded discretion under the GAAP with regards to earnings management hence reducing the quality of the financial reporting process, which results in adverse effects on resource allocation.
3. Earnings management could be regarded as a fraud when the company intentionally provides information that is materially misstated or simply put when the company is “cooking the books”. A good example would be when the company stashes earnings in reserve accounts during the good years and then use them to mask actual slowing earnings in the preceding years.

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