The Birth of American Innovation: Rise and Fall of General Electric Company (GE)

1. Table of Contents

3. Timeline of General Electric (GE)

1889: Thomas Edison had formed Edison General Electric Company from a handful of electricity
companies he'd been operating to bring them all under one tent.

Explain: Inventor Thomas Edison patented the incandescent light bulb after his laboratory tested
3,000 designs with the help of others electricity companies.

1892: General Electric Company incorporated as a result of a merger between the Edison General
Electric Company and their rival company, Thomas-Houston Company.

Explain: During this era, a competing firm called the Thomas-Houston Company. It occupied the
same space of electric appliances and technology and the two firms found overlap in their work and
patents. Then, the Edison General Electric Company quickly merged with their competitor Thomas-
Houston Company and form The General Electric Company.

1896: Just four years after its formation, General Electric became one of the original 12 companies to
be a part of the Dow Jones Industrial Average.

Explain: Companies include in Dows such as Coca-cola and Apple.

1981-2001: GE's best-known CEO, Jack Welch took over and kicked off a frenzy of sales and
acquisitions that reshaped the American corporate landscape. For example, GE purchased the RCA
Corporation that owned television network, a media giant which is the National Broadcasting
Company (NBC), Inc. GE had grown to a nearly $130 billion in the legendary Welch years.

Explain: Jack Welch took over as chief executive officer of GE and led the company for over 20 years.
He kicked off a frenzy of sales and acquisitions that reshaped the American corporate landscape.
There are more than 1,300 mergers and acquisitions and investment deals. For example, GE
purchased the RCA Corporation which is the National Broadcasting Company (NBC), Inc in aimed to
expand their function in international broadcasting area. As we know, NBC provide many show we
all know such as....(youtube). Therefore, they had grown nearly $130 billion.

2001-2017: GE's next CEO, Jeffrey Immelt, was hand-picked by Welch. The 2008 financial crisis dealt
a huge blow to the company where the stock fell 42% in 2008, forcing GE to rethink its operations.
Warren Buffett even stepped in and invested $3 billion to keep the company afloat. To continue with
their services, GE quickly sold off some of its biggest past money-makers, like NBCUniversal.

Explain: Troubled times which lot happened during Immelt's 16 years running GE. For example,
terrorist attacks in 2001 (militant Islamic extremist network al-Qaeda led by Osama bin Laden,
against the United States) and the financial crisis in 2008 triggered a long slump. Until, Warren
Buffett even stepped in and invested $3 billion to keep the company afloat. To continue with their
services, GE quickly sold their biggest past money-makers, like NBCUniversal. In spite of the
company's performance, Immelt maintained a pair of private corporate jets without telling GE's
board of directors.
2017-2018: Immelt stepped down as CEO after 16 years and was succeeded by GE Healthcare unit’s
head John Flannery. He was being removed in October 2018 by a unanimous vote from the board of
directors. He was ousted due to the slow pace of GE’s turnaround and a massive billions write-down
in its power division. The company also gets bumped out of the Dow Jones index in June 2018. He
was replaced by Larry Culp.

Explain: John Flannery, the head of GE's health care business stint as CEO. He served as CEO for 14
months only and being removed in October 2018 by a unanimous vote from the board of directors.
This because, the company lost over $100 billion in market value during his tenure and also gets
bumped out of the Dow Jones Industrial Average in June 2018. He was replaced by an outsider for
the first time who is Larry Culp.

2018-2021: Since Larry Culp took over, Culp gave Wall Street a reason to cheer as he stepped up
efforts to pare the company’s debt load. GE has been steadily reducing its debts. However a year
later, the COVID-19 pandemic hit GE’s finances especially in aviation unit. On October 6 2020,
General Electric also received lawsuit for alleging violations of Section 11 of the Securities Act of
1933 based on alleged misstatements and omissions related to performance of GE's business
segments.

Explain: Larry Culp took over in 2018 and he stepped up efforts to pare the company’s debt load.
Thus, their shares rose as much as 18 percent. Tp, hari tak selalu indah, dimana ade masalah lain
pulak yang muncul. First, COVID-19 pandemic hit GE’s finances resulting loss especially in aviation
unit. Second, the whistleblower accused the company of accounting fraud and resulting them to
received lawsuit for alleging violations of Section 11 of the Securities Act of 1933 based on alleged
misstatements and omissions related to performance of GE's business segments.

2. Background of the General Electric Company (GE)

- General Electric Co. is a technology and financial services company that develops and manufactures
products for the generation, transmission, distribution, control and utilization of electricity.

Explain: General Electric Co. is a technology and financial services company that develops and
manufactures products for the generation, transmission, distribution, control and utilization of
electricity. It was once one of the most profitable and iconic firms in America

- GE is a multinational conglomerate with many large operations. The company operates through
eight segments: Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare,
Transportation, Home & Business Solutions and GE Capital.

Explain:

*The Power & Water segment serves power generation, industrial, government and other customers
worldwide

* The Oil & Gas segment supplies mission critical equipment for the global oil and gas industry such
as liquefied natural gas and pipeline compression

* The Energy Management segment provides integrated electrical products and systems such as
circuit breakers that are used to distribute and manage power in a variety of residential
* The Aviation segment produces, sells and services jet engines and related replacement parts for
use in military and commercial aircraft.

* The Healthcare segment provides healthcare technologies such as medical diagnostics and patient
monitoring systems for example x-ray.

* The Transportation segment provides technology solutions for customers which such as railroad
including repair services and locomotive enhancements.

* The Home & Business Solutions invests in the development of consumer applications such as
lighting products.

* The GE Capital segment’s services include financial programs, home loans, personal loans and
other financial services.

- Therefore, their financial statement are is extensive and complex as the combination of eight
segments in a single statement. *Gambar financial statement

4. Nature of Fraud

1. Champion tax dodger

GE has attracted many criticisms due to its tax avoidance. Citizens for Tax Justice described it as
“champion tax dodger” after it released its Annual Report which revealed it had paid a total 0.9%
federal income tax rate in 2015.

2. Changes its financial reporting formats

GE change its reporting formats every few years to prevent analysts from being able to make
comparisons across time horizons. The company did that in order to conceal their accounting fraud.

Explain: GE would change its reporting formats every few years to prevent analysts from being able
to make comparisons accross time. In other words, GE went out of its way to make it impossible to
analyze the performance of their business units in order to conceal their accounting fraud.

3. Lack of transparency to shareholders

GE has been only providing top line revenue and bottom line profits for its businesses and
intentionally omitting various costs to hide damaging information. Declining profitability in various
parts of its business has minimal chance of settling its liabilities in the required time. Therefore, they
deliberately hiding its true position.

Explain: GE has been only providing top line revenue and bottom line profits and hiding huge actual
and potential liabilities. This is because, declining profitability in various parts of its business has
minimal chance of settling its liabilities in short time. Hence, the disclose positive current disclosures
to Wall Street and financial analysts to hide its true position.

4. Misled investors
A multiyear investigation by the SEC determined that the company misled investors in 2016 and
2017 by failing to disclose that the true source of much of its reported profits was a reduction of
earlier cost estimates. Overly aggressive accounting can distort a company's true financial condition
and mislead investors.

Explain: The company misled investors in 2016 and 2017 by failing to disclose that the true source of
the reported profits was a reduction of earlier cost estimates. Thus, the investors have been
blindsided to billion of dollar in profit. That why, overly aggressive accounting can distort a
company's true financial condition and mislead investors.

5. Detection of Fraud

6. Factor of Fraud (Fraud Triangle)

- The apparent need to maintain a competitive advantage and the pressure to maximize profits have
led General Electric to make some highly questionable and unethical business decisions over the
years.

7. Effect of Fraud

-The SEC is considering civil action against the company related to its accounting practices.

-the company’s pension remains the most underfunded in the country and its accounting is under
federal investigation.

- The start of the Great Recession also kicked off a long-term pension problem for the company. the
pension shortfall was driven up by years of accounting malpractice and inattention. GE's pension
fund fell from a $15.2 billion surplus to a $6.8 billion deficit from 2007 to 2008. The company was
debatably mismanaged. It didn't fund the pension properly, and now have got a massively unfunded
pension. GE still owes more than $27 billion in pension payments, according to its second-quarter
2019 report.

- General Electric has also sacrificed the safety of employees and the health of innocent citizens in
the name of scientific research and profit at all costs. Along with an extensive record of
environmental issues, General Electric has failed to take action of correcting product safety issues as
well.

-The company dropped as much as 14% after accounting expert and Madoff whistleblower Harry
Markopolos published a report alleging fraud. The team led by Markopolos claims to have already
found $38 billion in fraud.

-Lawrence Culp responded in turn, calling the report "market manipulation" and claiming
Markopolos released the document for personal gain.
- Markopolos was the lone person to sound the alarm on Bernie Madoff’s Ponzi operation, and
gained fame and credibility by turning out to be spectacularly right, raising fears he could be right
about GE as well.

- “Mr. Markopolos’s report contains false statements of fact, and these claims could have been
corrected if he had checked with GE before publishing the report.”

-Markopolos says he has given the report to securities regulators and that certain information he has
uncovered was given to law enforcement only, and is not in the public report.

-Harry Markopolos targeted the conglomerate in a new report, accusing it of issuing fraudulent
financial statements to hide the extent of its problems.

-Markopolos calls it "a bigger fraud than Enron."

-"My team has spent the past 7 months analyzing GE's accounting and we believe the $38 Billion in
fraud we've come across is merely the tip of the iceberg," Markopolos said in the 175-page report.
Markopolos alleges that GE has a "long history" of accounting fraud, dating to as early as 1995, when
it was run by Jack Welch.

-"It's going to make this company probably file for bankruptcy,"

-Lawrence Culp, chairman and CEO of GE said in a statement. "Mr. Markopolos's report contains
false statements of fact and these claims could have been corrected if he had checked them with GE
before publishing the report."

-Culp said the fact that Markopolos never talked to company officials before publishing the report
"goes to show that he is not interested in accurate financial analysis

-The Markopolos group looking into GE includes forensic accounting veteran John McPherson, co-
founder of MMS Advisors, which specializes in the insurance industry.

"GE utilizes many of the same accounting tricks as Enron did, so much so that we've taken to calling
this the GEnron case."

-GE is already under investigation by the Justice Department and SEC for potential
accounting practices.

-The Securities and Exchange Commission today announced that General Electric Co. (GE) has agreed
to pay a $200 million penalty to settle charges for disclosure failures in its power and insurance
businesses.