KPMG defends clean audits of SVB and Signature Bank

KPMG US defended its clean audit opinions of Silicon Valley Bank and Signature Bank, both of which collapsed within two weeks of KPMG signing off on their financials.

Ahead of an annual report, auditors consider whether there are doubts a company can continue as a going concern. Auditors must ensure corporate financials give a fair and current image of the company’s financial health, and consider negative shifts in business outlook such as the ability to meet capital requirements.

Auditors rarely raise the “substantial doubt” red flag because they don’t want to attract media attention to a struggling company (before it’s a matter for the courts, at least) and because they’d prefer to keep client relationships intact while technically operating within the generous bounds of good conduct.

KPMG audited SVB’s parent company since 1994 and Signature Bank since 2001. The Big Four accountancy’s audit opinion of SVB was dated February 24 and its audit opinion of Signature Bank was filed on March 1. SVB collapsed on March 10 and Signature collapsed March 12 as depositors fled after noticing heavy losses in the banks’ portfolios of fixed-income securities and the low proportion of deposits covered by a federal guarantee.

“As we take into account everything we know today . . . we stand behind the reports we issued and we think we followed all professional standards,” Paul Knopp, CEO of KPMG US, said at an New York University event on Tuesday.

“You have a responsibility until the day you issue the audit report to consider all facts that you know, so we absolutely did do that. But what you can’t know with certainty is what might happen after that audit report is issued.”

Knopp added, “There were actions taken in the month of March that set off another set of reactions that led to those two institutions being closed.”

Critics, however, say the extreme proximity of the collapses to KPMG’s clean audit opinions indicate important information was either missing or ignored. Laura Posner, a lawyer who represents institutional investors in securities fraud class actions, told Bloomberg that auditors should have considered whether liquidity challenges and still-rising interest rates posed a substantial risk to the company.

“I certainly would argue that there are a lot of red flags, a lot of smoke,” Posner said. “The timing is really problematic.”

An initial securities class action suit, filed in a San Jose federal court on Monday, is taking aim at SVB management, alleging the bank failed to disclose the existential risk that interest rate hikes posed. Under a Financial Accounting Standards Board (FASB) rule in effect since 2017, companies must evaluate every quarter their ability to stay afloat – delivering an earlier warning signal than yearly audits. Neither SVB nor Signature flagged these risks.

In the wake of the SVB and Signature collapses, the Public Company Accounting Oversight Board (PCAOB), is examining changing its going concern requirements, which critics find overly lax.