GE’s Rehabilitation Starts With Steps Like This

(Bloomberg Opinion) -- General Electric Co.’s recovery won’t be achieved with a quick fix, but with a hundred small steps. New CEO Larry Culp just took another important one.

GE announced on Friday that it would invite bids for the job of the company’s independent audit firm, a move that may ultimately see its nearly 110-year relationship with KPMG severed. GE will retain the firm as its auditor for 2019, but for the first time appears to be acknowledging that the status quo is unsustainable. Only 65 percent of votes at last year’s annual meeting were cast in support of continuing to enlist KPMG’s services, down from about 95 percent the previous year. Both Institutional Shareholder Services Inc. and Glass Lewis & Co. had recommended a change in auditor, in a rare move for the proxy firms.

GE’s Rehabilitation Starts With Steps Like This

Saying goodbye to KPMG is a tricky thing, as it would in some ways validate the many questions analysts and investors have posed to GE about the thoroughness of its financial controls and oversight. Autopsies of what went wrong are piling up, and the conclusions are narrowing in on an excessively optimistic and arrogant culture that led to poor capital-allocation decisions and a lack of proper vetting of risks and liabilities.

GE in January disclosed a $15 billion reserve shortfall in a legacy long-term care insurance business that had supposedly been stress-tested every year. As Vertical Research analyst Jeff Sprague put it at the time, for that kind of problem to materialize, it suggests “there wasn’t enough rigor behind this process.” The SEC and the DOJ are investigating the insurance-reserve shortfall as well as GE’s October disclosure of a $22 billion goodwill writedown in its power unit, which came just months after management had signed off on the balance in its previous quarterly filing.

GE’s Rehabilitation Starts With Steps Like This

The prospect of a new auditor doesn’t mean something fraudulent happened under the existing one, but it suggests the company is taking ownership of the fact that more questions should have been asked a lot sooner. Fresh eyes are long overdue. GE says its audit committee has been considering a range of options after results of its annual meeting vote, which suggests former CEO John Flannery was part of these discussions. But in what has become something of a trend in the Culp era, the new CEO is taking ideas that Flannery had proposed or debated and turning them into action.

Culp still has a way to go to rebuild GE: To win shareholder’s confidence, he must be transparent about the company’s numerous liabilities, reset earnings expectations to an achievable level (ideally with metrics more closely aligned with GAAP accounting) and give a viable plan to reduce GE’s hefty debt load. But his moves this week – which also included appointing a power and insurance expert to the board – increasingly give me confidence that he realizes how paramount accountability and transparency are to GE’s survival.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

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