General Electric (NYSE:GE)
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By Mark Maurer
General Electric Co.'s decision this week to appoint an outsider as finance chief is rekindling speculation over whether the company will end its audit relationship with KPMG that goes back more than a century.
The Boston-based industrial conglomerate is in the middle of a transformation effort. The U.S. Securities and Exchange Commission is investigating GE's accounting practices, alongside the U.S. Justice Department.
"They're finding outsiders to rejuvenate the process for not only changing the operations of the company but also the accountability and verifiability of results," said Nick Heymann, a William Blair & Co. analyst.
GE said Monday that Carolina Dybeck Happe would take over as chief financial officer next year. Ms. Dybeck Happe, currently CFO of Danish shipping giant A.P. Moller-Maersk, would join another outsider in GE's C-suite: Chief Executive Larry Culp, who took the top spot in 2018 after years at Danaher Corp.
A new auditor would add credibility to the company's efforts to uphold agreements with regulators, Mr. Heymann said. He speculated that GE could name a new auditor as early as March, after GE reports annual earnings.
Deane Dray, an RBC Capital Markets analyst, also said the appointments of outside executives increase the likelihood that GE would move on from KPMG. "They do want a break from the past," Mr. Dray said, "and what clearer message is there than to make a change to the auditor?"
"If there's ever going to be a time, this is it," he added.
A KPMG spokeswoman said it is good governance for audit committees to review their external auditor relationships. "We welcome the future opportunity to work with all the stakeholders to demonstrate the value KPMG can continue to deliver," the spokeswoman said.
GE's audit committee is preparing to formally invite bids for an independent auditor following completion of its 2019 audit, the company said in an April regulatory filing.
"The ultimate timing for the process and the appointment of an audit firm following the tender will be based on the progress toward completing planned portfolio actions and circumstances at that time," the company said at the time.
The process could result in KPMG remaining the auditor, a GE spokeswoman confirmed.
If not, Big Four competitors PricewaterhouseCoopers and Ernst & Young could be top contenders, said Peter Bible, the chief risk officer at accounting firm EisnerAmper LLP and a former chief accounting officer at General Motors Co.
Those firms have expertise in auditing large manufacturers and financial services companies. PwC, for example, audits Ford Motor Co. EY audits GM. Representatives for EY and PwC declined to comment.
But GE has conflicts of interest with those firms and another Big Four firm, Deloitte Touche Tohmatsu. PwC handles GE's tax work, and EY is a major lobbyist for GE in Washington. Deloitte provides certain nonaudit services for GE. Deloitte didn't respond to a request for comment.
GE said in a regulatory filing last year it planned to adopt new internal procedures to "mitigate the cost and complexity" of ending its nonaudit engagements with any firm it retains as its independent auditor in the future.
The act of switching auditors for a multinational conglomerate after more than a century would be a massive undertaking.
The new firm would need to firmly grasp how the previous auditor tested the company's accounting systems and processes, and how they assessed management's judgment, Mr. Bible said.
The auditor would also need to acquire a deep understanding of the company's application of tax laws in international markets -- and the employees' accounting methods there, he said. The bigger and more expansive the company, the more complex and time-consuming the process becomes.
Shadowing the outgoing firm during the final audit would be key: "If they go cold turkey," Mr. Bible said, "that'll be very difficult on the company's internal people."
Write to Mark Maurer at email@example.com
(END) Dow Jones Newswires
November 26, 2019 17:34 ET (22:34 GMT)
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