Caterpillar uncovers internal fraud; wipes out millions in impairments

Caterpillar is carrying out an internal investigation after claims of misconduct at one of its recently acquired companies.

The mining machinery manufacturer stated that it "has uncovered deliberate, multi-year, coordinated accounting misconduct concealed" at the recently acquired ERA Mining Machinery company's subsidiary Zhengzhou Siwei Mechanical & Electrical Manufacturing, in China.

"Caterpillar’s investigation determined several Siwei senior managers engaged in deliberate misconduct beginning several years prior to Caterpillar’s acquisition of Siwei," it said.

It went on to stress that "the misconduct at issue commenced at Siwei well in advance of Caterpillar’s acquisition. We believe it was perpetrated without the knowledge of any Caterpillar employee who did not come over to Caterpillar as part of the Siwei acquisition".

Due to the fraud at Siwei, Caterpillar expects to suffer a "non-cash goodwill impairment charge of approximately $580 million, or $0.87 per share, in the fourth quarter of 2012".

Following the investigation Cat removed several senior managers at the company, installing its own new leadership team.

Cat initially bought ERA for US$ 887 million in 2011 in a move designed to claw back a greater share of China's mining industry.

ERA is a coal mining equipment manufacturer specialising in hydraulic roof supports, and Cat’s takeover represented a bet mining growth in China would continue strengthen.

“The actions carried out by these individuals are offensive and completely unacceptable," Caterpillar's CEo Doug Oberhelman said.

"This conduct does not represent, in any way, shape or form, the way Caterpillar does business or how we expect our employees to work, which is spelled out in Caterpillar’s Worldwide Code of Conduct.

“Once our investigation confirmed that misconduct had taken place at Siwei, we moved quickly and decisively to hold the responsible leaders directly accountable for the wrongdoing. Accountability is a critical way that we measure leaders at Caterpillar, and it is my expectation that leaders set an example and are accountable for their actions and results.”

Despite the hit of $580 million, or more than 65% of the acquisition cost of ERA, Caterpillar says it has not changed its view on working in China.

The accounting misconduct that occurred at Siwei does not reflect the way Caterpillar does business and is not in keeping with our Worldwide Code of Conduct, it said.

"The actions of the individuals involved were clearly wrong and purposely designed to overstate the profitability of the company prior to our acquisition. This does not change our plans to develop, grow, and improve the business."

Caterpillar will release a 2013 outlook with its earnings release on 28 January.

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