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Audit Regulatory Board Mum on Bank Failures as Critics Question Clean Audit Opinion for Silicon Valley Bank

March 31, 2023 

For now, the Public Company Accounting Oversight Board (PCAOB) will not publicly address recent bank collapses, triggered by the abrupt, stunning failure of Silicon Valley Bank (SVB) three weeks ago.

“I understand recent bank failures may be top of mind for many of you,” PCAOB Chair Erica Williams said at a meeting of the Standards and Emerging Issues Advisory Group on March 30, 2023.

“The PCAOB is acutely aware of concerns from investors, and I know there are outstanding questions that must be answered,” Williams continued. “But today’s meeting is not the forum for providing those answers, and it’s important we avoid speculation.”

When SVB failed, banking agencies quickly stepped in to try to prevent a wider financial meltdown. The adverse effects of its failure reverberated around the world.

Various reasons may have been at play that led to its demise, such as the bank’s business model which was more susceptible to runs when certain aspects of economic conditions deteriorate; a large portion of customers who were mainly in the tech sector had deposits of more than the FDIC-insured $250,000 limit; and the bank’s poor risk management, which the Federal Reserve warned about at least starting from 2019. The bank grew very quickly, but it did not have commensurate risk management controls intended for large financial institutions. The FDIC said the 10 largest deposit accounts at SVB in the aggregate was $13.3 billion, signaling concentration of risks that could impact the bank’s financial conditions in the near-term. Before its collapse, Silicon Valley Bank was the 16th largest bank and the second largest failure in history. The largest failure was Washington Mutual in the 2008 financial crisis.

Where Was the Auditor?

However, critics questioned whether its external auditor, KPMG LLP, did its job properly. It gave a clean audit opinion in February. Yet in a matter of few weeks, the bank collapsed. The Big Four firm had no comment.

And anytime a public company auditor is involved, fairly or not, some inevitably question what the audit regulatory board is doing or whether it can do a better job of supervising accounting firms that audit publicly-traded companies to protect investors and hold firms to account when they perform deficient audits.

The bank had reportedly not only poor risk management but also insufficient internal controls. But there is also a requirement for the auditor to disclose critical audit matters (CAMs) that investors should be aware. These are matters that have been communicated to the audit committee, are related to accounts or disclosures that are material to the financial statements and involved especially difficult judgment from the auditor.

The KPMG’s auditor’s report did not discuss weak risk management or internal controls. This could mean that the audit team allegedly might not have fully understood the banking business or the volatile macroeconomic environment as well as the current landscape of the information technology industry. Many of the banks’ customers were in the tech industry. The PCAOB routinely found problems with quality control at audit firms in the past, including those of KPMG.

“As you know, the PCAOB is prohibited from discussing specific inspection and enforcement matters, including whether or not enforcement matters or investigations have been initiated,” Chair Williams said.

“As a general matter, the PCAOB carefully monitors registered firms and will not hesitate to take action when rules or standards are violated,” PCAOB Chair Williams added. “Without speaking to any individual entity or person, as I have said many times, the PCAOB is using every tool in our enforcement toolbox to pursue wrongdoing wherever we find it and impose significant sanctions against those who put investors at risk.”

However, former SEC chief accountant Lynn Turner, who is on the PCAOB’s advisory groups, believes the board should be more transparent to the public.

“The silence of the PCOAB with respect to the lack of information in audit reports provided to investors on these failed banks is quite deafening,” Turner said. KPMG also audited Signature Bank, which was shut down by banking agencies.

Going Concern Discussions

In the meantime, a few have also been questioning whether the current accounting and auditing standards on going concern—a company’s ability to pay when obligations come due—are appropriately set.

Currently, the PCAOB has going concern on its standard-setting agenda. The board is considering how its standard should be revised.

Today, there are requirements for management to disclose when there is a “substantial doubt” that it could survive when obligations come due during the next 12 months based on a “probable” threshold. Auditors also have to evaluate going concern but using a number of factors. Thus, there is a mismatch between the accounting and auditing literatures.

Following the 2008 financial crisis, investors said they want earlier warnings or just warnings about a poor financial health of a company, and they believe that the thresholds can be better calibrated.

But it would be tricky to develop a more useful standard. For example, critics believe that a threshold that is set too low could trigger unnecessary panic and exacerbate the situation.

[Thomson Reuters]

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