ACC 696 Milestone One (CH)

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Southern New Hampshire University *

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Milestone One School of Accounting, Southern New Hampshire University ACC-696: Situational Ethics Accounting December 4, 2022

2 Background The company I choose was General Electrics (GE). The reason why choose General Electrics is because one of my good friend’s brothers use to work for GE and he liked it for a period of time to travel around the world and perform his duty as an engineer with the power stations. I choose GE because I was always interested in what GE does. GE was created by a Thomas Edison’s Edison Electric Company and Thomson-Houston Electric Company in 1982. General Electric (GE) was one of the founding members of the DOW in 1896 (Swaminathan, 2019). The ethical violation that was that GE misled investors by describing its GE power profits without explaining that one-quarter of profits in 2016 and first three quarters of 2017 stemmed from prior cost estimates (SEC Press Release,2020). The SEC code of ethics and SOX Section 406, ethical standards that were violated was the honest and ethical conduct of GE, Timely and truthful disclosure that the GE’s company directors involved in preparation of such reports ….. shall make disclosures that are full, fair, accurate, timely and understandable (Code of ethics, n.d). Ethical Violations A. Internal The main participants that are in perpetrating the violation would be the CEO at the time Jeff Immelt. He was CEO of GE for 16 years. Since Jeff Immelt stepped down in July of 2017, the succeeded CEO John Falnnery with over 25 years as a GE executive. GE then ousted Flannery a year later. They both were the executive at GE and would render that that financial statements have disclosed all material factors and would have signed that internal controls are adequate. The ethical responsibilities of the professional accountants

3 are as follows Responsibilities, The public Interest, Integrity, Objectivity and independence, due care and scope and nature of service. External The main participants involved in the violation would be KPMG who audits the financial statements of GE, the Stakeholders of the shares of GE who were misled by GE. The stakeholders where effected by the stakeholders by the investment or potential investment that the shareholder or investor put in GE. They relied on fraudulent and misleading financial statements that supported GE to be a well off corporation with additional cash flows there were from intercompany transfer transactions that would not have changed the bottom line for profit. B. The AICPA code of professional conduct that was violated are public interest and Integrity. According to AICPA, Public interest has members to act in a way that will serve the public interest, honor the public trust, and demonstrate a commitment to professionalism (AICPA, n.d). GE violated the public interest by not providing the public and the investors with misleading financial statement that did not disclose within the financial statements that most of the profits were from one quarter in 2016 and nearly half of the profits from 2017 stemmed from the reduction in the prior cost estimates. GE also did not provide the investors the disclosure the reason for the increase in current cash collection were coming at the expense of cash in future years and were from internal receivables between GE Power and GE Financial services business (SEC Press Release, 2020). Integrity is an element of character fundamental to professional recognition. Integrity can accommodate the inadvertent error and honest difference of opinion but it cannot accommodate deceit or subordination of principle. GE violated AICPA’s 300.040

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4 integrity by be deceit and subordinated to personal gain and advantage. The non- disclosure of the GE selling longer term receivables to GE capital allowed GE to increase industrial future cash flow by moving them into the present. This material non-disclosure increases earnings per share and would have the investor to invest in the stock market with GE and purchase more shares without know that the additional cash flow is being taking from future years. The importance of independence would give you greater creditability to ensure that revenue and expenses are reported correctly and the review or audit of the financial statement will not have any bias or personal interest with the result of the financial records. Independence is required You must be independent in fact because it allows the auditor to perform attest services without influence that compromise professional judgment and allows you to act with integrity and professional skepticism (Mintz, 2020). To be independent in appearance allowed a third party looking in to conclude that the integrity, objectivity and professional skepticism has not been compromised. General Electric’s CEO Jeff Immelt at the time stated in the New York Times,” that he made mistakes made tactical errors and lapses in judgement, he was working with the best information he had. McKinsey had done a study; Goldman Sachs had offered its assurance. The markets moved in unpredictable ways” (Gellas, 2021). The main stakeholders were the public and the investors. The share price collapsed 76% in 2017 and 2018 and forced GE to dismantle its empire to pay down debt. I do not think that they kept their objectivity because if you have invested in GE would have believed that GE was doing very well with the financial statement information that has been

5 published to the public. This information would have been used to be objective and either continue to hold on to the shares or even purchase more share based on the financial number GE had inflated. The investors/stakeholders would be blindsided in 2017 when the stock would plumet down and C. Legal The legal implication for GE was 6 violations of Exchange Act. One of the violations were to file reports to the exchange act to maintain disclosure controls and procedures, 2 – requires reporting companies to make and keep books, records, and account in reasonable detail, accurately and fairly reflect transaction, 3- requires all reported companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurance, 4, from making public a non -GAAP financial measure that taken together with information accompany that measure which is presented , not misleading, 5-reporting companies to file with the commission complete and accurate annual and quarterly reported and reports of material events such as earnings announcement (USA before the SEC, 2020). GE without admitting or denying the SEC findings, GE agreed to pay $200 million penalty and report for a one year period to the SEC regarding certain accounting and Disclosure controls in its insurance and power businesses (SEC Press release, 2020). Social The social implication is that GE has had multiple years of SEC penalties in regarding the accounting practices that were considered accounting fraud or deficiencies. GE also has penalties with the Department of Justice for toxic securities abuse. This is putting a damper on the accounting profession by having a well-established company as General

6 Electrics and one of the big four accounting firms KPMG to not catch these fraudulent activities. Economic The stakeholders who have invested in GE over the years have lost significantly their future income for retirement, wealth and livelihood. GE stock on Jan 1,2016 colsed at $243.08. On Jan 1, 2018 GE closed at $58.23. Stakeholder lost millions of dollars within a span of 2 years on the investment with GE. D. GE has code of ethics that is on their website (GE, n.d). The specific code of ethics that was violated was to reporting and recordkeeping. GE’s Code of ethics for record keeping states the we prepare timely, accurate and complete financial information for us in reports to management, investors, regulators and other stakeholders. GE violated this by providing financial statements that did not disclose the that GE Power profits from one quarter of profits in 2016 and half of the first three quarters of 2017 stemmed from reductions in its prior cost estimates (SEC Press release, 2020). GE also violated “we maintain effective processes and internal controls that fairly reflect transactions or events as well as prevent or detect inappropriate transactions” ( GE, n.d). The transactions that cover GE insurance business reinsured billions of dollars to long term care policies which include the future cost of growing older, such as nursing homes and assisted livings and underpriced these cost that have claims that exceeded the original projection for the years inflicting losses. GE insurance business lowered the projections claims and stated that they did not have insurance losses.

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7 Reference Code of ethics. (n.d.). Retrieved December 4, 2022, from https://www.sec.gov/Archives/edgar/data/783412/000143774915001399/ex14.htm Gelles, D. (2021, February 5). Jeff Immelt oversaw the downfall of G.E.. now he'd like you to read his book. The New York Times. Retrieved December 4, 2022, from https://www.nytimes.com/2021/02/05/business/jeff-immelt-general-electric-corner- office.html GE | Building a World That Works | General Electric . (n.d.). Retrieved December 5, 2022, from https://www.ge.com/sites/default/files/S&L_Booklet_English_0.pdf Mintz, S. M. (2020). Threats to Independence . In Ethical obligations and decision making in accounting: Text and cases (5th ed., pp. 221–222). essay, McGraw-Hill Education. SEC Press release . SEC Emblem. (2020, December 9). Retrieved December 4, 2022, from https://www.sec.gov/news/press-release/2020-312 Standards and statements . AICPA. (n.d.). Retrieved December 4, 2022, from https://us.aicpa.org/research/standards Swaminathan, A. (2019, March 22). The history of GE: From Thomas Edison to jet engines to being kicked out of the Dow . Yahoo! Retrieved December 4, 2022, from https://www.yahoo.com/now/ge-sale-whats-left-212611211.html United States of America before the Securities and Exchange Commission ... SEC.gov. (2020, December 9). Retrieved December 5, 2022, from https://www.sec.gov/litigation/admin/2020/33-10899.pdf