GE’s accounting and the blame game

GE's bad news kept popping up. Earlier on Monday, the stock initially fell after GE said in its annual report that 2016 and 2017 earnings a share would be “restated” lower as it adopted new accounting standards. GE’s “recasting” of prior period numbers wasn’t a result of an error or misstatement, but just the company’s way of providing more disclosure and more detail about the impact of the new standards. Nevertheless GE nominated an accounting expert to its board. 

It was very surprising to many people. GE that I know was very strong in its compliance to accounting standard. When GE O&G acquired Wood Group Well Support business, some of its accounting practices including the revenue recognition criteria continued for some time until an audit by the GE CAS (corporate audit staff) team revealed that some revenue in Thailand should not have been recognised because it did not meet the criteria in its strictest interpretation. My team was notified on the finding and were asked to reverse the revenue in the same quarter. Immediately we had a bad quarter and a lot of people were unhappy. It was not their fault but they had to bear the consequences of not meeting the quarter target. We bit the bullet and moved on, with better understanding of GE accounting practices. We eventually managed to recover the “lost” revenue in the subsequent quarters by taking actions to complete all the requirements for proper revenue recognition. 

The turmoil in GE is long in the making. Some people blamed on Jeff Immelt, and some blamed on Jack Welch. Some said that Jack was angry at Jeff over the direction of the company. Of perhaps it should be the other way around. Jack, who is now a management guru, were asked to come out and defend himself over the giant conglomerate with outsized risk he handed over to Jeff. Perhaps Jeff was not the right guy. Perhaps he was (unknowingly) set to fail. Jeff were also asked to defend himself; that he has done a lot to unwind the conglomerate of its past direction ie. selling off Capital and other businesses and returned it to its industrial core plus digital. It seems that all the good things that Jack and Jeff have done for the company were overshadowed by the recent fall outs. 

This is a typical case of negativity bias. 

The negativity bias also known as the negativity effect, refers to the notion that, even when of equal intensity, things of a more negative nature have a greater effect on one's psychological state and processes than do neutral or positive things. In other words, something very positive will generally have less of an impact on a person's behaviour and cognition than something equally emotional but negative. 

People are more confident in the accuracy of their impression on someone or something when it is formed more not he basis of negative traits than positive traits. An example paradox: a dishonest person can sometimes act honestly while still being considered to be predominantly dishonest; on the other hand, an honest person who sometimes does dishonest things will likely be reclassified as a dishonest person. It is expected that a dishonest person will occasionally be honest, but this honesty will not counteract the prior demonstrations of dishonesty. Honesty is considered more easily tarnished by acts of dishonesty, and not the other way around. 

This negativity bias is certainly dangerous if left unchecked. Companies do not just rise or fall down because of one person, especially those with the size and complexity of GE. The board, the top and regional leadership teams played significant roles. Investors seemed to cheer the three additional new board members as well as the removal of longest serving board members for the right reason. Both Jack and Jeff laid some solid ground work for GE’s future. Perhaps more things need to be done. CEO John Flannery sent a stern warning to those who have lost faith in the company, saying people who bet against GE’s resolve and passion do so “at their own peril.”

Perhaps people don’t want to bet against GE, they are just tired of it.