It Took 110 Years for GE to Change Its Auditing Firm

Industrials

Published: June 22, 2020 10:20 am

In April of 2018, General Electric Co. (NYSE: GE) announced that the company would restate results for 2016 and 2017 to reflect a new accounting standard. Prior to that, GE had announced a first-quarter charge of $4.2 billion related to the change.

Two of the country’s leading proxy-advisory firms, Institutional Shareholder Services (ISS) and Glass, Lewis & Co., had recommended that shareholders vote against retaining KPMG as GE’s independent auditing firm. Beginning next year, that recommendation will be adopted by the company.

More than two years after ISS and Glass Lewis recommended a change, GE on Monday announced that the audit committee of the company’s board selected Deloitte as the industrial giant’s independent auditor. The bidding process for the role had begun in December 2018. KPMG will remain as GE’s auditor through the end of December and will file the company’s annual report on SEC Form 10-K.

KPMG or one of its predecessor companies has been GE’s auditing firm since 1909, one of the longest-running relationships in the country.

The beginning of the end of the 110-year relationship came in January of 2018 when GE announced that it would take a $7.5 billion after-tax charge related to GE Capital’s run-off insurance portfolio. GE Capital also had to make statutory reserve contributions of about $15 billion over the next seven years.

The timing was frightful for GE. Then-CEO John Flannery commented: “At a time when we are moving forward as a company, a charge of this magnitude from a legacy insurance portfolio in run-off for more than a decade is deeply disappointing.”

The charge and the massive reserve contributions likely caused Glass Lewis to comment that it normally supports a company’s choice of auditors “except when we believe the auditor’s independence or audit integrity has been compromised.”

While long-running client-auditor relationships are not unusual, change is slow in coming. In 2018, ISS noted that there are solid reasons for keeping the same audit firm but that there is “the risk that a long-tenured auditor can become too close to a client.” A new auditor has the “potential … to uncover problems previously unidentified.” GE is about to find out.

GE stock traded down about 1.3% at $7.05 early Monday morning, in a 52-week range of $5.48 to $13.26. The consensus 12-month price target on the stock is $8.15. It traded at around $13 a share in April of 2018.