KPMG Nixes GE Loaned Tax Staff Engagement
KPMG will no longer loan tax professionals to GE during busy season, according to a source close to the situation. KPMG was billing an extra $8-10 million, over and above the audit each year, for the service.
Loaning, assigning, or “seconding” tax or any “bookkeeping” staff to an audit client is prohibited by the Sarbanes-Oxley Act of 2002 and by regulations that precede Sarbanes-Oxley. It looks like a regulator got to both KPMG and GE, but quietly. I doubt we’ll ever see a public sanction or fine from the PCAOB or the SEC for KPMG.
My story exposing this prohibited activity by an auditor for an audit client was published in Forbes last March.
KPMG has been GE’s auditor for more than 100 years. Former SEC Chief Accountant Lynn Turner was surprised and quite angered at my revelation. In addition, Turner commented in his newsletter on an email I received from the Carpenters Pension Fund after my column appeared at Forbes.com. The pension fund sought to hold GE and KPMG accountable for auditor independence and have a discussion at the annual meeting about auditor rotation. They were blocked by GE and the SEC:
KPMG has been the auditor of GE for over 100 years. In light of that, I understand the Carpenters Pension Fund submitted a auditor rotation shareholder proposal for shareholder consideration to GE and about 45 other large cap companies with audit firm relationships that exceeded 10 years. GE and numerous other companies requested that the SEC issue a no-action letter that would allow them to omit the proposal from their 2012 proxy statement.
Despite the fact that GE had not changed auditors for over 100 years, and auditor rotation had not been “normal business” for GE, and despite the fact that according to reports KPMG was not independent of GE due to non compliance with the SEC’s own independence rules as a result of loaning staff to GE, similar to acts in Australia where the SEC sanctioned KPMG with an enforcement action, the SEC staff obliged, agreeing with the companies’ argument that the issue was “ordinary business.” I understand the Carpenters Pension Fund requested that the SEC staff take the no-action issue to the full Commission for a decision, but that the staff rejected that request. As a result, the SEC staff denied shareholders – the owners of GE – the opportunity to vote on a non binding shareholder proposal raising the issues of auditor independence and firm rotation.
Rather the SEC staff have apparently chosen to allow a non independent KPMG to remain as the auditor, according to reports.
My story at Forbes, with all the details is here.
The KPMG situation is only the tip of the iceberg. Accounting firms are using “unique” logic to provide accounting services to its audit clients in violation of the SEC rules. Even consulting services provided to audit clients creates significant conflicts of interest. Many feel this situation can only be cured by establishing “audit only” companies whose only job would be to provide audit opinions. The PCAOB is well aware of this issue and is asking for comment on the “audit only” concept.
@ Paul Kurgan
I agree and I am in favor of the audit only firm with assignments handed out via a government agency to take the money out of the picture.
The most egregious examples of the consulting activities provided to audit clients I’ve seen are huge tax fees compared to the audit fee, M&A advisory under the guise of tax services, and GAAP/IFRS advice. Although it is prohibited for the auditor to advise an audit client on accounting standards, I have seen numerous examples of proxy data about audit fees explaining audit-related fees as GAAP and IFRS “training” and advice.
Why is it that KPMG finds itself in sticky situation often but always comes out clean? It seems like their repetitive violation of regulations is not punishable enough for them to adapt strict ethics.
Being a new accountant it is my understanding that most Big 4 have separate divisions that provide auditing and consulting services to clients. Such consulting like SOX 404 is essential to a business entity so as M&A, and other operational advisory. If an auditing company separates specialists who have client’s audit engagement from specialists who provide consultinng services I don’t see it as a conflict of interest as separation is strong enough.
But on another hand I can see how separating auditing of internal controls and issuing an advice on correcting internal controls issues (including GAAP training) can become challenging.
With regard to kpmg it needs to be also be noted that they had an unusually close relationship on the tax side with GE in India. Based on independence reviews presumably by PCAOB on the audit the firm relieved its partner on the taxs side in India. So it seems a lot has happened on this case.
@People who change
Thanks for that update! Very interesting.
Poor Anne above, if she’s only a recently qualified accountant (at the time of the posting), seems to have been infected very quickly by the disease. I too have been saying it for years that auditor rotation should be mandatory and I like the audit only concept, particularly being handed out via a government agency. I would promote that and I would advocate a fine of at least one years gross profits where PLUS 50% of partner salaries where the audit rotation rules were not followed.
The other benefit is that one would be increasing the circulation of money among a broader group of hands and I would dictate that it must be rotated outside of the big 4 once every 4 years.
The dominance of the Big 4 needs to be tackled.