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#MoneyBeat At GE, KPMG Keeps its 109-Year Streak Alive

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NocRoom    0

A lot is changing at General Electric — but not its auditor.

CEOs and controversies may come and go at GE, the company can restructure and might even break up, but KPMG LLP is forever – or at least it has been for the past 109 years. The giant accounting firm and its predecessors have audited GE’s books since 1909. GE reaffirmed in its proxy statement Monday that it intends to keep KPMG as its auditor for another year despite all the other issues it has on its plate, including a Securities and Exchange Commission investigation of some aspects of its accounting.

But the GE-KPMG relationship is the rule, not the exception. Companies tend to stay with the same auditor for decades, or longer, as a new regulation requiring disclosure of auditor tenure is reminding investors.

Half the 30 companies in the Dow Jones Industrial Average have used the same auditor since at least the mid-1960s, and only two have switched to new auditors in the last 15 years. Procter & Gamble has used Deloitte & Touche LLP and its predecessors since the consumer-products company was incorporated in 1890.

Many observers believe a long-tenured auditor can get too cozy with a client, interfering with its ability to perform a tough, impartial audit. But companies and auditors say it’s better to have a long-tenured auditor that knows the company well, instead of having to get a new one up to speed.

GE said in its proxy that its long relationship with KPMG benefits the company through “institutional knowledge” and “deep expertise,” and that avoiding the need to break in a new auditor saves management time and resources. Last year, KPMG won shareholder ratification as GE’s auditor with more than 94% of shares voting in favor. GE and KPMG didn’t respond to requests for comment.

In Europe, regulators have addressed the issue of long-tenured auditors by requiring companies to change auditors periodically – so-called auditor “rotation.” In the U.K., for instance, Barclays PLC decided in 2015 to switch to KPMG from PricewaterhouseCoopers in order to comply with regulators’ limits on audit tenure. PwC and its predecessors had audited Barclays since 1896.

In the U.S., the Public Company Accounting Oversight Board, the industry’s regulator, publicly mulled the idea of auditor rotation several years ago, but fierce pushback from the industry and Congress prompted them to shelve it.

“There is little evidence that mandatory firm rotation improves audit quality or otherwise benefits investors,” said Cindy Fornelli of the Center for Audit Quality, which represents auditors of public companies.

Research by the consulting firm Audit Analytics has found that changing auditors has advantages and disadvantages: The number of restatements a new auditor helps prompt by uncovering problems a previous auditor failed to detect is roughly the same as the number that occur because of the new auditor’s lack of familiarity with the company and its industry.

What the PCAOB has done instead is to require auditors to disclose how long they’ve worked for a client. Some auditors and companies already disclose that information, but the new rule, which took effect this year, requires it of everyone and puts the disclosure in a standard place: the auditor’s report assessing the accuracy of a company’s financial statements that is included in each company’s annual report.

For investors, auditor tenure is “an important data point in making their investment decisions and assessing the potential risks to the objectivity of the auditor,” said Steven Harris, then a member of the PCAOB, when the board adopted the requirement last June.

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