When it comes to banking, compliance is king.
That makes proper accounting and internal controls queen, at the very least.
This, as the collapse of Silicon Valley Bank (SVB) last week and Signature Bank over the weekend, comes just a handful of days after big-four accountant KPMG LLP reportedly gave both now-collapsed institutions a signed-off bill of clean financial health.
KPMG cleared its audit of SVB’s financials 14 days before the bank collapsed. Signature Bank’s numbers were given the go-ahead on March 1, just 11 days before it entered FDIC (Federal Deposit Insurance Corporation) receivership.
Auditors are supposed to issue warnings if companies are in trouble, particularly if those signs point to any doubts about an organization’s ability to continue as a going concern after the financial statements are audited.
Although both SVB and Signature Bank were felled within mere days of each other by customer bank runs that began after KPMG filed its audit reports, the timing is somewhat embarrassing given how short the period was between the well-regarded auditor’s financial health reports and the disastrous realities that played out.
A representative for KPMG did not immediately reply to PYMNTS’ request for comment.
Read More: The Silicon Valley Bank Story No One Has Told
SVB was formerly a top-20 bank in the US by size. It worked with more than a thousand venture capital (VC) firms, and cash from countless startups made up its around $212 billion deposit base.
Observers have pointed out that SVB’s own financials laid out the situation in its apparent entirety — in a December 2022 footnote, the bank disclosed that it had $15 billion of “unrealized” off-book losses, more than its reported $12 billion paper equity cushion.
The bank attempted to sell certain assets at a loss to fill the gap, and when that initiative was made public, the news spooked SVB’s customers who rushed en masse to withdraw their money.
Now, tech and venture capital’s favorite bank, founded in 1983, is no more.
As reported by PYMNTS, a newly filed (March 13) class-action complaint alleges that SVB’s parent company did not properly disclose risk to investors.
“I do feel like SVB would still be here if they had a week to figure things out,” Drew Edwards, CEO at money mobility payments company Ingo Money told PYMNTS CEO Karen Webster in a conversation yesterday (March 13).
What makes this [situation and contemporary environment] different, added Edwards, “is how fast that $42 billion flew out of the bank. This just happened on everybody’s mobile phone.”
The incident’s shock waves are difficult to overemphasize. Crypto-focused, New York-based Signature Bank became one of the many midsize banks facing a crisis of confidence after regulators seized SVB.
Facing a similar run on deposits, it too collapsed.
A joint action by the Federal Reserve and Treasury Department, announced Sunday (March 12), took the unique step of designating both SVB and Signature Bank as a systemic risk to the financial system, which gives regulators flexibility to backstop uninsured deposits and contains as much of the financial damage as possible.
As reported by PYMNTS, President Biden’s administration is investigating bank failures.
“We must get the full accounting of what happened and why those responsible can be held accountable,” the President said during a speech yesterday (March 13).
Observers believe that what KPMG knew about the two banks’ financial situation and what its team of auditors missed has the potential to be the subject of further regulatory scrutiny.
It is just the latest in a recent string of embarrassments for some of the world’s leading accounting and audit firms.
Ernst & Young, along with KPMG, worked with the now-insolvent German payment processor Wirecard, whose executives are currently on trial.
Wirecard’s business was plagued by alleged accounting malpractice since its very inception, and the company’s former COO Jan Marsalek remains on the run and has been a familiar face on Europe’s “Most Wanted” list since 2020.
Then there is the accounting situation and $8.6 billion black hole at failed crypto exchange FTX, where company executives, as part of their guilty plea deals, admitted to falsifying financial documents for both accountants and investors.
It almost makes FTX’s one-time rival crypto exchange Binance’s outright refusal to have its balance sheet audited somewhat refreshing — if it weren’t for the potentially disastrous pitfalls the opaque exchange may be hiding behind its claim that auditors are still “getting a handle” on the crypto industry.
In a no-win situation for auditors, it’s the general public who is generally the one that loses most.
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