is emerson electric (emr) too close to its auditor?

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Disclosure Insight Report

August 03, 2015

Is Emerson Electric Too Close To Its Auditor?

Disclosure Insight reports provide commentary and analysis on public company interactions with investors and with the SEC.

Emerson Electric (EMR) Summary: Emerson Electric had two undisclosed SEC investigations in the past few years. One was a large, multi-year probe of Emersons relationship with KPMG, its auditor of more than 50 years. That ended Nov-2014. The second investigation was a FCPA matter involving Saudi Arabia, which was of relatively short duration. It ended Jan-2015 and appears of little consequence to investors today. Emerson made sweeping claims of confidentiality to try to keep records related to the KPMG investigation secret. We challenged these claims and prevailed in securing release of enough documents to leave us questioning whether Emerson Electric is too close to its auditor. Facts of Interest or Concern: We've been tracking undisclosed SEC investigative activity at Emerson since Oct-2013. We now know of two undisclosed SEC probes directly involving this company.

The following is based on documents obtained exclusively by Probes Reporter. The SEC Investigation of KPMG This is the first undisclosed SEC investigation we learned about involving Emerson. It was titled, KPMG LLP Certain Auditor Independence Issues [sic]. Rather than use its own personnel, or some other entity, since at least 2009, Emerson was paying KPMG to provide personnel on a seasonal basis as borrowed staff to help with tax preparation. 2012 fees proposed by KPMG for Tax Compliance Services totaled $1.65 million. Of this, $325,000 was for Tax Loaned Staff Services. This investigation ran for three years; from Sep-2011 through Nov-2014. It generated at least 23 boxes of records. Compared to other records and information in our database, we categorize this as a moderately large and protracted SEC probe. From the Emerson proxy, filed Dec-2014

KPMG LLP served as the Companys independent registered public accounting firm for fiscal 2014 and has been retained continuously as the Companys external auditor for more than 50 years.

Emerson made sweeping claims of confidentiality to protect records related to the KPMG investigation. We previously criticized Emerson for
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August 03, 2015


its efforts to keep investors in the dark this way. See, Something to Hide: Emerson Electric Claims Nearly 16,000 Pages of Investigation-Related Documents Are Secret We challenged Emersons confidentiality claims on a subset of the records at issue (We asked the SEC to examine one of the 23 boxes of records). The SEC found Emersons confidentiality claims were unsubstantiated on more than 50% of the records reviewed. Out of that one box of records, 1,540 pages were released to us. The SEC withheld 1,460 pages from that same box on grounds they contained legitimate confidential information. Our analysis is based largely on what was contained in those 1,540 pages released to us as well as SEC responses to our requests made on Emerson since 2012. Many of the records claimed as confidential by Emerson were simply KPMG business brochures and other mundane records already in circulation (See below). This is typical when a company makes sweeping, if not bogus, claims of confidentiality. Documents released reference periods back to about 2008 and include letters of engagement between Emerson and KPMG regarding the borrowed staff, status updates, and related email exchanges. We also received Public Company Accounting Oversight Board reports on KPMG that cite an array of shortfalls that agency had found involving the auditors work across its client base (clients are not named though). The Saudi Arabia Investigation The second investigation we found involved Emersons hiring, compensation, and business practices in Saudi Arabia. This investigation was shorter, only running from Jul-2014 through Jan-2015. We were not informed of any confidentiality claims made on records related to this probe.

The SEC refused to release the Case Closing Recommendations on Emersons closed probes. This is the one report the SEC produces which describes why the probe was opened, what work took place, and the conclusions reached. Case Closing Reports and some of the documents that were released appear at the end of this report. Our Take: Unless it has broader FCPA implications, we are comfortable with Emerson not having disclosed the Saudi Arabia investigation. However, we think it was wrong for Emerson to keep investors in the dark and to further make sweeping claims of confidentiality regarding the auditor investigation. The auditor probe was no small SEC investigation. It generated a lot of records and took three years of management time and company expense to resolve. But Emerson made the active decision, repeatedly, to keep it from investors. So far as we know, and as is quite common, the SEC ended the KPMG probe without recommending an enforcement action. But it still has negative implications for the judgment and transparency of Emerson management. It also has negative implications for the audit committee, the board and overall corporate governance. In a marketplace with no shortage of alternatives, this management team instead chose to borrow staff from its auditor. Thats convenient, but lazy. Arms-length? Apparently, the SEC wondered too. The governance implications for the audit committee and board are both serious and substantial. They can only be properly vetted if the probe is known to outsiders. Emerson worked hard to make sure that didnt happen. Investors may rightly wonder: What else is Emerson hiding? KPMG / Emerson is a marriage of 50+ years. Apparently, no one wants it to end anytime soon. .
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This is from one of the letters in which the SEC informed us

Emerson Electric was claiming confidential treatment on

records related to what we later learned was the KPMG probe.

The Case Closing Reports along with records from the KPMG investigation and the Saudi Arabia investigation appear below.
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JohnText Box This is a page from a brochure KPMG routinely gives to clients and prospects. Emerson Electric made the bogus claim that records like this are "confidential" and therefore should not be released.JohnRectangle

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August 03, 2015


To learn more on our process and what our findings mean, click here Notes: The SEC did not disclose the details on investigations referenced above. The SEC reminds us that its assertion of the law enforcement exemption should not be construed as an indication by the Commission or its staff that any violations of law have occurred with respect to any person, entity, or security. New SEC investigative activity could theoretically begin or end after the date covered by this latest information which would not be reflected here.

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