International Tax Panorama

On Feb 24 KPMG signed off on the audit report for SVB Financial Group, the parent of Silicon Valley Bank. Within 2 weeks Regulators seized SVB after a surge of withdrawals threatened to leave the bank short of cash.

Now the auditor faces scrutiny as it gave a clean chit within two weeks without warning is trouble for the auditor. 

Silicon Valley bank deposits peaked at the end of the first quarter of 2022 and fell by $25 billion, or 13%, during the last nine months of the year. This means that deposits were declining during the period of KPMG’s audit. If the decline was affecting the bank’s liquidity when KPMG signed off on the audit report, that information should have been included. Since it was not, the question becomes, did KPMG know or should have known what was happening?

Auditors should warn investors if companies are in trouble. They are required to assess “whether there is substantial doubt about the entity’s ability to continue as a going concern” for the next 12 months following the issue of financial statements.

Auditors also use their reports to highlight “significant audit matters” that involve challenging, subjective or complex decisions. KPMG focused on accounting for credit losses at Silicon Valley Bank in that section of its report. But it didn’t address the potential of Silicon Valley Bank. Continuing to hold debt securities till maturity—which the bank lacked at the end.

Even if the bank was not struggling last year, KPMG had to evaluate developments occurring after the balance-sheet date, so as to fairly present the company’s financial position.

Both bank audits were for 2022, so auditors weren’t examining the banks’ books for the time period they were in trouble. But auditors are expected to highlight the risks faced by the companies they audit. They are expected to raise important issues that arise after the companies have closed their books and before the completion of the audit.

On the other hand KPMG said it is not responsible for things that happen after the completion of the audit.

Scrutiny by Regulators:

The auditing firm may face additional scrutiny. KPMG also audited First Republic Bank, whose shares were down 76% on Monday morning even after boosting liquidity to the bank from JPMorgan Chase and the Federal Reserve.

KPMG’s audit work will be scrutinized by regulators including the Public Company Accounting Oversight Board and the SEC, as well as private litigants who lost money in the Silicon Valley bank collapse. 

The FDIC is one of the agencies that may ask KPMG pointed questions. After a bank fails, the FDIC’s Office of the Inspector General regularly conducts investigations and publishes detailed reports called failed-bank reviews that identify the causes of the collapse and the parties most responsible.

Such reports are carefully studied by private litigants who look for defendants to sue for damages. On that front KPMG caught a break over the weekend: The government said it would freeze all uninsured depositors of both banks, helping KPMG bail out as well. The backstop will not affect the losses suffered by the shareholders of the banks.

Is there any defence for KPMG?

One argument KPMG could try in court is that the bank run began after the firm signed off on its audit report. The California Department of Financial Protection and Innovation, a state banking regulator, said in a filing Friday that the bank was “in good financial condition prior to March 9,” when depositors pulled out $42 billion.

The bank’s troubles put KPMG in a win-win position. Had it taken note of Silicon Valley Bank’s declining deposits, or issued a warning about Silicon Valley Bank’s ability to continue as a going concern, it could have set off a run on the bank. By not raising these issues, it would have to face questions as to how it missed the signs that the bank was headed for trouble.