The “critical audit matters” standard reportedly failed to catch key issues in the recent bank failures.
The standard, introduced in 2017 and meant to make audit opinions more useful to investors, failed to highlight the unrealized bond losses that brought down Silicon Valley Bank, The Wall Street Journal reported Monday (April 10).
Under the standard, auditors are required to record matters that both have a significant impact on the financial statement and involve auditor judgments that are “especially challenging, subjective or complex,” according to the report.
Beyond the case of Silicon Valley Bank, audits of nine other banks that were exposed to bond losses similarly did not highlight the interest-rate and liquidity risks in their reports on financial statements for 2022, the report said.
In each case, while the auditors reported critical audit matters around loans and other bad debt — the risk that played a major role in the 2008 financial crisis — they did not report the issue that brought down Silicon Valley Bank.
Experts offered different reactions to the WSJ on this report. One said this issue was certainly one of the sort that the critical audit matters standard was meant to address, while another said what happened with Silicon Valley Bank could not have been foreseen, as it was in part driven by social media.
As PYMNTS reported March 14, both Silicon Valley Bank and Signature Bank were reportedly given a signed-off bill of clean financial health by big-four accountant KPMG days before the two institutions collapsed.
KPMG cleared its audit of SVB’s financials 14 days before the bank collapsed and gave Signature Bank’s numbers the go-ahead 11 days before it entered Federal Deposit Insurance Corp. (FDIC) receivership.
Both banks were felled within mere days of each other by customer bank runs.
In the wake of these happenings, small and regional banks are experiencing major fallout.
Although the worst of the panic seems to have subsided, there are real fears about whether deposits will continue to fall for these smaller players in the sector.
Such a development could jeopardize lending in general, as banks and credit unions of all sizes need deposits to make loans.