Caterpillar Inc. removed several senior managers at its recently acquired ERA Mining Machinery’s Chinese subsidy, Zhengzhou Siwel Mechanical & Electrical Manufacturing, Co., Ltd., or Sewei, after uncovering a long-running accounting scheme that inflated profits.

Caterpillar described the faculty accounting as deliberate and coordinated by several managers for Zhengzhou Siwei Mechanical & Electrical Manufacturing Co., a unit of ERA Mining Machinery Ltd., which Caterpillar paid as much as $734 million last June, The Wall Street Journal reported.

The discovery will result in a non-cash charge of about $580 million, or 87 cents a share, to fourth quarter results, the company said.
Siwei makes roof-support equipment for underground coal mines. Caterpillar said it first noticed discrepancies between the inventory in Siwei’s records and its own physical inventory of equipment in November 2012 following the acquisition. Caterpillar then initiated an investigation that it said revealed years’ worth of faulty costs allocations that allowed profits to be overstated. The probe also identified improper revenue recognition practices that boosted sales, The Wall Street Journal reported.

The responsibilities for Siwei manufacturing operations have been moved to Caterpillar’s China operations division, led by Vice President Qihua Chen, while its sales and support team will report to Kebao Yang, Caterpillar’s global mining general manager for China and Korea.

“The actions carried out by these individuals are offensive and completely unacceptable. 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 world-wide code of conduct,” Caterpillar Chief Executive Douglas Oberhelman said in a statement.

The company said it is not aware of any criminal investigation or arrests by Chinese authorities in conjunction with the accounting problems. It would cooperate with any government probe, it said.

Steve Wunning, group president with responsibility for resource industries, said the company still believes the Siwei acquisition fits with Caterpillar’s strategy in the Chinese coal mining industry.

Caterpillar closed on its purchase of ERA Mining last June. It agreed to pay, between $653 million and $734 million for ERA, based on the acquired business’s financial performance. The approval came after ERA warned that its profits were weighed down by higher finance costs, as state-controlled rivals had access to cheaper steel.