Lights Out: Pride, Delusion, and the Fall of General Electric

by Thomas Gryta

Throughout 2016, Power teams combed through the division’s portfolio of service contracts, each representing payments from power generators to maintain the turbines that GE had sold them. One strategy they often used was to offer discounted turbine upgrades to customers in exchange for extending the length of their contracts as far out as 2050. Such long contracts allowed for huge payoffs—paper profits—once the assumptions were adjusted. Executives also scoured existing contracts for ways to change underlying assumptions. The entire book of GE’s service contracts was reviewed at least once a year. These reviews produced profits that GE could use to hit targets for Wall Street, but they were really future profits, produced by accounting adjustments alone. There was no actual new cash coming in. Such gaps between reported income and cash flow usually close pretty quickly, because they represent a simple timing issue—a bill wasn’t paid, or cycles didn’t match up to quarters. When such gaps are frequent and not closed quickly, it can be a red flag to investors. They see a telltale sign of aggressive accounting, if not fraud, when a company records a lot of profits but no cash to back them up. Anyone can run up a credit card, but someone has to pay that bill eventually. While contract accounting is complicated, investors still expect to see real money coming in the door.