The SEC seems to have a soft spot for General Electric. Photographer: Patrick T. Fallon/Bloomberg
The SEC seems to have a soft spot for General Electric. Photographer: Patrick T. Fallon/Bloomberg

The Securities and Exchange Commission unveiled a curious settlement today with KPMG LLP over violations of auditor-independence rules. And it looks like the agency went out of its way to protect the Big Four accounting firm and its longtime audit client, General Electric Co.

The settlement papers came in two parts. The first was an administrative order, under which the firm will pay $8.2 million in fines and disgorgement. The SEC said KPMG provided bookkeeping and other prohibited services to three audit clients. The SEC said some KPMG partners also owned stock in one of the clients, which is a no-no.

The SEC didn't name the clients, which is odd, because the agency has in other auditor-independence cases. One that comes to mind was a 2010 settlement with a former vice chairman at Deloitte & Touche LLP, Thomas Flanagan, who was caught trading shares of Berkshire Hathaway Inc. and other Deloitte audit clients. Another was a 2002 case against KPMG, which was the auditor for AIM Funds at the same time it had invested $25 million in one of the mutual funds that AIM ran.

The second part of today's settlement offers more intrigue. The SEC issued a separate report about an investigation into KPMG's practice of lending tax professionals from its own staff to certain audit clients. Once again, the SEC didn't name any of the companies. But it's a safe bet that one of them was GE.

Francine McKenna, who writes about accounting and auditing for her website re: The Auditors, broke the story in March 2011 that KPMG was doing this at GE. Some of the KPMG employees working at GE even were given GE e-mail addresses, she reported.

The SEC spent much of its report explaining what sorts of staff-lending arrangements it had uncovered at KPMG and why they are prohibited. Audit firms' employees aren't allowed to act as employees of an audit client. "The legal consequence of an auditor lacking independence is that it violates, and causes its audit clients to violate, various provisions of the federal securities laws," the report said. The commission said it issued the report "in order to address uncertainty regarding the commission's interpretation" of its rules on the subject.

The report also said "the commission has determined not to pursue an enforcement action with regard to these loaned staff engagements." However, it didn't explain why. And given all of the secrecy, I can't help but wonder.

KPMG has been GE's auditor for more than 100 years. GE is a systemically important financial institution, because of its GE Capital finance arm. The company paid KPMG almost $100 million in fees for 2012. It has paid the firm more than $1.3 billion since 2000. Former SEC Chairman Mary Schapiro, who left the agency in December 2012, joined GE's board last year. And you never know what a fresh pair of eyes might find on GE's books if the SEC ever ordered it to get a new accounting firm.

Could any of those things have been an issue when the SEC decided not to name any audit clients? Or penalize KPMG for lending them its tax staff? Or disqualify KPMG as GE's outside auditor? An SEC spokesman, John Nester, declined to comment.

(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)

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