It was a case of “too little, too late” for Caterpillar executives and shareholders as investigations of inventory discrepancies at its newly acquired ERA Mining Machinery company in China led to the discovery of deliberate accounting misconduct.
Caterpillar accountants argue they and their independent consultants were misled by their Chinese counterparts at ERA and its subsidiary, Siwei Mechanical & Electrical Manufacturing, who worked to inflate the value of the company prior to its acquisition last year.
Caterpillar is the world leader in manufacturing earthmoving equipment and the Siwei acquisition was one of the company’s largest, staged as part of a strategy to break into China’s massive coal production industry. China is the largest excavator and user of coal in the world and the Siwei plant manufactures hydraulic roof supports for coal shafts.
Chairman and CEO Douglas Oberhelman stated he believed the accounting malfeasance had been going on for years before Caterpillar even considered buying the company, and that senior executives in China conspired to cover their tracks in anticipation of the sale.
As a result, the Peoria, Illinois-based company will be forced to take a $580 million writedown in 2013, although executives have assured Wall Street analysts and stockholders that the setback will not have a significant impact on the year’s earnings. This is despite the fact that the total loss represents a full one-tenth of its earnings from last year.
Even so, accountancy hawks are quick to point out that the amount written down far exceeds the “goodwill” amount it added to its books for the purchase. This so-called goodwill is an intangible asset that Caterpillar accountants argue they have one year to reconcile as is allowed by law following a merger or acquisition.
Some believe Caterpillar will not be able to account for this intangible asset, but a final determination will have to wait until the company formally files with the Securities and Exchange Commission.