General Electric (GE) has been courting negative publicity because of its questionable accounting practices. The maker of jet engines, light bulbs and MRI machines is being bombarded with lingering questions about its reporting practices.
In 2009, the SEC charged GE with accounting fraud and overly aggressive accounting practices, which lead to false and misleading statements to investors. GE paid $50 million to settle those charges without admitting to or denying wrongdoing.
Last year, the SEC started an investigation into the company’s accounting practices related to revenue recognition. The SEC investigation was expanded in scope following the reporting of $6.2 billion loss on its portfolio of long-term care insurance policies.
Who GE’s Auditor?
A centurion, KPMG is the external auditor of GE and they have been so for the past 109 years.
Regulators and media often hold the viewpoint that long-tenured auditors can become too close to a client, which erodes audit quality, while a new auditor can be more efficient in uncovering problems previously unidentified, which leads to enhanced audit quality. Many commentators and analysts believe that, in the case of GE, the auditor’s extensive tenure has jeopardized KPMG’s independence which ultimately questions the audit quality rendered by the firm.
KPMG is part of an exclusive audit club, also known as the “Big 4” (others are E&Y, Deloitte, and PWC) revered for their professional expertise and commitment to independence. Yet, that pristine reputation has been lacking lately for KPMG—the firm has been chasing its own demons.
- In the USA, six accountants, including former employees of PCAOB, were charged with leaking confidential data to KPMG. The SEC said the sensitive information helped KPMG clear regulatory inspections at a time when the firm was under pressure to clean up its audit record (akin to dishonesty in an exam).
- In South Africa, KPMG’s South Africa division found the accounting firm had missed red flags in its auditing of companies owned by the Gupta family in that country. South Africa is arguably KPMG’s most important market in Africa, as it boasts the continent’s most industrialised economy, its biggest companies and its largest stock market (lacking independence).
- In Canada, KPMG’S Canadian division is the subject of two complaints from one of the country’s largest financial worker’s unions. KPMG is charged with setting up offshore tax structures in the Isle of Man to help wealthy Canadians avoid paying taxes, which is against the profession’s code of conduct” (violation of professional code of ethics).
Shareholder Watchdogs
Shareholder watchdog groups worry that GE and KPMG may have become “too cozy” during their 109-year-old relationship. Both Glass-Lewis and Institutional Shareholder Services are urging shareholders not to ratify KPMG as GE’s auditor at the company’s annual shareholder meeting on Wednesday.
Ultimate Outcome
KPMG is most likely to continue to serve as the external auditor of GE despite widespread shareholder dissatisfaction with KPMG. The negative proxy votes not to ratify KPMG as the auditor satisfaction in annual shareholder meetings are unlikely to topple the audit firm. Why?
Under the current US regulations, only GE’s Audit Committee (a subcommittee of GE’s board consisting of independent members) has the ultimate authority to retain or dismiss auditors. The audit committee is also free to ignore how shareholders may feel about the auditor.
This is what we call “hullaballoo!”
May 8, 2018
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