GE GE Aerospace

By Michael Rapoport 

General Electric Co. has signaled it may want to switch to a new auditor, after more than a century with KPMG LLP. But that might not be so simple.

One problem: The only other audit firms big enough to take on GE's massive audit all have potential conflicts of interest that could block them from doing so.

PricewaterhouseCoopers LLP does GE's tax work, and GE's 600-employee tax-services team is now housed at PwC. Ernst & Young LLP is one of GE's biggest lobbyists in Washington. Deloitte & Touche LLP has business ties to GE that a GE unit has said would pose conflict-of-interest concerns.

GE has had a series of accounting problems in recent years that KPMG, which has audited GE since 1909, failed to catch. After 35% of GE shareholders voted last April against KPMG continuing as GE's auditor, the company said it would explore other options.

GE's audit would be a lucrative prize. The company paid KPMG $133.3 million in 2018 for its audit and other services, the most by any U.S.-traded company, according to consulting firm Audit Analytics. Over the past decade, GE's fees to KPMG have totaled nearly $1.1 billion.

GE is trying to eliminate at least some of the conflicts to ensure it can switch auditors, and has implemented new procedures "to mitigate the cost and complexity" of doing so, the company said in its proxy statement last week. But it's a complex, time-consuming process, and GE hasn't specified what changes it might have to make to its existing arrangements or what they might cost.

A GE spokeswoman said the company plans to start a formal auditor-search process after its 2019 audit, which KPMG will handle. "The ultimate timing of this rotation will depend upon circumstances at the time," she said.

An EY spokesman said "we fully expect to be able to be compliant" with conflict-of-interest rules by the time GE makes a decision. Spokesmen for KPMG, PwC and Deloitte declined to comment.

Any new auditor would have to follow Securities and Exchange Commission rules that a company's auditor be "independent" -- free of any relationships that could compromise its ability to perform a tough, impartial audit of the company's finances. Auditors aren't allowed to provide many types of consulting services to their audit clients, for instance.

That creates a dilemma for big companies like GE: They're often audited by one of the Big Four while tapping the others for different services.

"If you want a choice, you need to be careful about the connections and the relationships you have," said Steve Glover, a Brigham Young University accounting professor.

PwC took over GE's global tax team in 2017, and it now provides tax planning, advice and compliance to both GE and other PwC tax clients. At the time, PwC said the GE tax unit could ultimately bring in more than $1 billion in yearly revenue.

Auditors can provide certain tax services to their audit clients, but the breadth of PwC's tax work for GE could create a conflict, auditor-independence experts say. A lot depends on the specifics. If PwC advocated for GE on tax issues or did anything that affected GE's financial statements, it could pose a problem.

EY has lobbied for GE through its Washington Council Ernst & Young arm since at least 2005. GE paid the firm $420,000 in 2018, the most for any lobbyist GE uses, to lobby Congress and the Treasury Department on tax issues, according to lobbying-disclosure reports and the Center for Responsive Politics.

Deloitte provides certain nonaudit services for and has business relationships with GE that would be barred under the SEC's auditor-independence rules. That disclosure was made by Baker Hughes in an SEC filing in July 2017, following GE's combination of its oil and gas business with Baker Hughes. Deloitte had served as Baker Hughes's auditor.

Write to Michael Rapoport at Michael.Rapoport@wsj.com

(END) Dow Jones Newswires

March 27, 2019 09:10 ET (13:10 GMT)

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