A wrap-up of writing about GE since 2011.
General Electric’s $6.2 billion hit to income in January to catch up on losses on long-term care insurance contracts highlights the problem accounting standard-setters now say will be solved with some new rules, set to take full effect in 2021.
The Financial Accounting Standards Board introduced a big change on Wednesday in how U.S. insurers must update for economic events that should change their assumptions on long-term insurance contracts. FASB says new rules will now require insurers, and their auditors, to annually review the assumptions made at the inception of the contract and over its life and update each year, if necessary.
The impact of applying new discount rates, for example, will be recognized immediately in earnings when the rule goes into affect in 2021.
Until now, when a long term insurance contract was signed, for example in 1980, the original assumptions such as discount rates that were used to estimate cash flow each year stayed in place, even if the contract was still in force almost forty years later.
Under existing accounting standards, the assumptions used for long-term care contracts such as GE’s North America Life & Health reinsurance portfolio, aren’t reviewed if they don’t show losses.
re: The Auditors.com Jan 28th, 2014
It’s been almost three years since I first broke the story of KPMG’s loaned tax staff arrangement with audit client GE. On January 24 the Securities and Exchange Commission (SEC) announced an $8.2 million settlement with KPMG over violations of auditor-independence rules. KPMG’s settlement includes pay back of some fees earned on the illegal services and some fines. The wheels of justice turn very slowly. Unfortunately, none of the companies involved were named and, as far as I can see, the GE case was not one of the three cited as a subject of the enforcement. What did KPMG do wrong in the cases the SEC did cite? It’s a dog’s breakfast of broken independence rules and not even the tougher ones:
According to the SEC’s order, KPMG provided various non-audit services – including restructuring, corporate finance, and expert services – to an affiliate of one company that was an audit client. KPMG provided such prohibited non-audit services as bookkeeping and payroll to affiliates of another audit client. In a separate instance, KPMG hired an individual who had recently retired from a senior position at an affiliate of an audit client. KPMG then loaned him back to that affiliate to do the same work he had done as an employee of that affiliate, which resulted in the professional acting as a manager, employee, and advocate for the audit client. These services were prohibited by Rule 2-01 of Regulation S-X of the Securities Exchange Act of 1934.
The SEC did do something unusually satisfying in this enforcement proceeding and that’s when I gained some level of gratification, and vindication, for my report on KPMG’s violations at GE. The SEC published the results of an investigation that did not end in an enforcement action.
Some detractors might shout, “Hey FMcKenna, if it is GE they’re talking about, KPMG and GE must not have done anything wrong if the SEC left GE out of the enforcement action.”
Au contraire, mon lecteur! Let’s look at what the SEC said KPMG did do:
The Division’s investigation identified that, from at least 2007 through 2011, KPMG entered into loaned staff engagements with multiple SEC audit clients. These loaned staff engagements involved non-manager level KPMG professionals performing junior level tasks related to tax compliance. For example, a typical task performed by the loaned staff was inputting data into federal or state tax returns using an audit client-issued computer, while being supervised by a member of the client’s tax department. Among other things, KPMG loaned staff assigned to these engagements generally:1. were supervised by, took sole direction from, and had their performance evaluated by, the audit clients’ managers;2. performed the same work as employees of the audit clients;3. worked exclusively and continuously at the audit clients’ places of business during such engagements for extended periods of time, ranging up to six months; and4. used the audit clients’ resources, including physical work spaces, client-issued computers and email addresses, and internal networks, spreadsheets and shared folders,to perform their loaned staff work.KPMG paid the loaned staffers in accordance with its typical practices for compensating KPMG employees and continued to provide KPMG benefits to these individuals. Fees for loaned staff arrangements were billed to the audit clients in a manner similar to the manner in which KPMG bills its clients for other non-audit services.Compare that to how I described what KPMG did at GE, based on a report from a source on the ground in 2011:In defiance of these provisions, KPMG – GE’s auditor – provides “loaned staff” or staff augmentation to GE’s tax department each year. These “temps” perform tasks that would be otherwise the responsibility of GE staff. Sources tell me KPMG employees working in GE tax have GE email addresses, are supervised by GE managers – there is no KPMG manager or partner on premises – and have access to GE employee facilities. They use GE computers because the software required for their tasks is GE proprietary software.
re: The Auditors.com, Jan 26, 2012
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.
(PwC eventually took over the tax co-sourcing arrangement for GE. In a twist, PwC bought the employees and is loaning them back to GE.)
Via the WSJ in January 2017: PricewaterhouseCoopers and General Electric Co. have agreed to move GE’s in-house global tax team over to PwC as the accounting firm adds global expertise and the industrial conglomerate continues slimming down.
PWC will absorb more than 600 employees under the agreement announced Thursday. GE’s tax employees in 42 countries will move to PwC, where they will provide tax planning, advice, compliance and other tax services to both GE and other PwC tax clients.PwC will also take over GE’s tax technologies as part of the five-year renewable agreement.
The unusual deal isn’t an acquisition, and no money is changing hands. PwC expects to benefit from the agreement by enhancing its operations globally. The firm already has 41,000 global tax professionals, so adding the GE workers would increase the total by only about 1.5%.
re: The Auditors.com, Sep 21st, 2011
Going Concern reported yesterday that KPMG professionals have been ordered to preserve all correspondence and documentation related to the tax “loaned staff” assignment it has with long-time client GE. That means someone – the SEC or PCAOB – is investigating.
Forbes, Mar 29, 2011
My problem with President Obama’s choice of Immelt is exactly that. Immelt knows how to manage GE for the benefit of GE, not GE for the benefit of the US economy. One does not necessarily trickle down into the other.
My other problems with GE go back to the legacy of Jack Welch, GE’s insidious influence on how people all over the corporate world are measured and rewarded, and their history as a bad actor when it comes to internal controls and accounting manipulation.
So it’s not surprising that GE uses their auditor, KPMG, to help them put their “zero” tax return together.
KPMG – GE’s auditor – provides “loaned staff” or staff augmentation to GE’s tax department each year. These “temps” perform tasks that would be otherwise the responsibility of GE staff. Sources tell me KPMG employees working in GE tax have GE email addresses, are supervised by GE managers – there is no KPMG manager or partner on premises – and have access to GE employee facilities. They use GE computers because the software required for their tasks is GE proprietary software.
This type of “secondment” to an audit client is never allowed. KPMG should know better. KPMG was recently sanctioned by the SEC for a similar transgression involving their Australian office.