Ethics in Investing (Topic 1)
General Electric is one of the most widely known companies in the world, producing anything from toasters to refrigerators, to washers and driers. General Electric has diversified its internal businesses very well throughout its long history as one of the most successful companies in the world. When the company began to broaden its focus outside of industrial goods and services, turning into a largely financial and media driven corporation, things began to change. GE not only increased overall profitability, but also brought on new standard procedures to illustrate and report their financial results and processes, including the use of hedge accounting.
Hedge accounting is a relatively common practice, however, one that requires substantial effort to understand and use correctly. It was GE’s misuse of hedging that ultimately led to their need to restate financial statements for years 2002 through 2004, as well as parts of 2001 and specifically each quarter in 2003 and 2004.
The error was encountered during a recurring audit review when GE’s internal auditors found that some of the company’s derivatives didn’t qualify for hedge accounting. Hedge accounting is used by GE to protect its financial services entities from random and unpredictable changes in interest and currency exchange rates abroad.
To better understand the issue at hand and to grasp the overall reasoning behind the need to restate its financial results, hedge accounting and the use of derivatives should be described further. After this description, we’ll take a look at exactly what GE found in its audit and how they determined that a restatement was essential.
Hedging & Derivatives:
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