KPMG Gave Banks Clean Bill of Health Did KPMG do anything wrong or was there any misconduct by KPMG$?$ Was there fraud present? Is management guilty of fraud?

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A20 Tuesday, March 1s A8 Tuesday, March 14, 2023 THE WALL STREET JOURNAL. THE COLLAPSE OF SVB KPMG Gave Banks Clean Bill of Health Accounting firm faces scrutiny after collapse of SVB and Signature Bank soon after audits BY JONATHAN WEIL AND JEAN EAGLESHAM Silicon Valley Bank failed just 14 days after KPMG LLP gave the lender a clean bill of health Signature Bank went down 11 days after the accounting firm signed off on its audit. sion from 1998 to 2001. Two crucial facts for deter mining whether KPMG missed the banks' problems are when and when the banks mest when manage ment and KPMG's auditors be came aware of the crisis. What is known about Silicon Valley Bank is that deposit out- flows accelerated last month. In its March 8 statement, Sili- con Valley Bank said "client cash burn has remained ele vated and increased further in February." The bank said its What KPMG knew about the deposits at the end of February two banks financial situation were lower than it had pre- and what it missed will likely be dicted in January. the subject of regulatory scru tiny and lawsuits, KPMG signed the audit re- port for Silicon Valley Bank's parent, SVB Financial Group, on Feb. 24. Regulators seized the bank on March 10 after a surge of withdrawals threatened to leave it short of cash. "Common sense tells you that an auditor issuing a clean report, a clean bill of health, on the 16th-largest bank in the United States that within two weeks fails without any warn- ing, is trouble for the auditor," said Lynn Turner, who was chief accountant of the Securi- ties and Exchange Commis Failure's Fallout Both bank audits were for 2022, so suditors weren't scrubbing the banks' books for the time period when they ran into trouble. But auditors are supposed to highlight risks faced by the companies they audit. They are also supposed to raise important issues that occur after companies close their books and before the audit is completed. A spokesman for KPMG de clined to comment on the spe- cific audits, due to client confi- dentiality. In a statement, the firm said it isn't responsible for things that happen after an au dit is completed. Silicon Valley Bank's depos its peaked at the end of the first quarter of 2022 and fell $25 billion, or 13%, during the final nine months of the year. That means deposits were de- clining during the period of KPMG's audit. If the decline was affecting the bank's liquid- ity when KPMG signed off on the audit report, that informa- tion likely should have been in cluded. Since it wasn't, the question becomes, did KPMG know or should it have known what was going on? Auditors are supposed to warn investors if companies are in trouble. They are required to evaluate "whether there is sub- stantial doubt about the entity's ability to continue as a going concern" for the next 12 months after the financial statements are issued. Auditors also use their re- ports to highlight "critical audit matters" that involve challeng ing, subjective or complex judg ments. KPMG in that section of its report focused on the ac counting for credit losses at Sil- icon Valley Bank. But it didn't address Silicon Valley Bank's ability to continue holding debt securities to maturity-which, in the end, the bank lacked. Even if the bank wasn't Selloff of Bank Stocks Deepens struggling last year, KPMG was required to evaluate develop ments that occurred after the balance-sheet date so the com- pany's financials were pre- sented fairly. Signature Bank, which was seized by regulators on Sunday, also faced a run last week, but it didn't have the same balance- sheet issues as Silicon Valley Bank. KPMG signed off on its audit on March 1 KPMG said it isn't responsible for things that happen after an audit is completed. Signature's bet on the crypto industry led to a surge in de- posits, which went into reverse as that market struggled. A large amount of its deposits were uninsured, making it more likely the customers would flee at any sign of trouble. But it hadn't disclosed the same losses on its investments as Silicon Valley Bank, giving it a greater ability to pay depositors The auditing firm could face additional scrutiny. KPMG also Shares of regional banking companies, Including Comerica, KeyCorp, Truist and U.S. Bancorp, plummeted Monday, Large banks, including Wells Fargo and Citigroup, also fell, though not as sharply. audited First Republic Bank, whose shares were down 76% Monday morning, even after the bank got a liquidity boost from JPMorgan Chase and the Fed- eral Reserve. The shares closed down nearly 62% KPMG's audit work likely will be scrutinized by regulators, in cluding the Public Company Ac counting Oversight Board and the SEC, as well as private liti gants that lost money when Sili- con Valley Bank collapsed, said Erik Gordon, a professor at the University of Michigan's Ross School of Business. A share holder lawsuit against the firm concerning its Silicon Valley Bank audit "won't be an easy one for people to win, even though the timing is spectacu- larly embarrassing for KPMG," Mr. Gordon said. A PCAOB spokeswoman said the regulator "cannot comment on ongoing inspection or en- forcement matters. An SEC spokesman declined to com- ment on the Silicon Valley Bank audit. One argument KPMG could try in court is that the run on the bank started after the firm signed its audit report. A state banking regulator, the California Department of Financial Protec tion and Innovation, in a filling Friday said the bank was "in sound financial condition prior to March 9" when depositors withdrew $42 billion Douglas Carmichael, the PCAOB's chief auditor from 2003 to 2006, said it was un- clear how the California regula- tor could have determined the bank's financial condition. "It seems like a premature analysis. How could they know without examining?" he said. "Auditors are always under the microscope when the com pany fails shortly after the issu- ance of a clean opinion," Mr. Carmichael said. "The shorter the period, the greater the con- cern would have to be." Silicon Valley Bank almost doubled its assets and deposits during 2021. It got in trouble because it bought long-term, low-yielding bonds with short- term funding from depositors that was repayable upon de mand. Accounting rules said it didn't have to recognize losses on the assets as long as it didn't sell them. When rising interest rates caused the bonds' value to drop, it got stuck in them, and they kept falling. Silicon Valley Bank still had to maintain enough liquidity to pay with- drawals, which became increas ingly difficult. Frank Joined A20 Tuesday, March 1s A8 Tuesday, March 14, 2023 THE WALL STREET JOURNAL. THE COLLAPSE OF SVB KPMG Gave Banks Clean Bill of Health Accounting firm faces scrutiny after collapse of SVB and Signature Bank soon after audits BY JONATHAN WEIL AND JEAN EAGLESHAM Silicon Valley Bank failed just 14 days after KPMG LLP gave the lender a clean bill of health Signature Bank went down 11 days after the accounting firm signed off on its audit. sion from 1998 to 2001. Two crucial facts for deter mining whether KPMG missed the banks' problems are when and when the banks mest when manage ment and KPMG's auditors be came aware of the crisis. What is known about Silicon Valley Bank is that deposit out- flows accelerated last month. In its March 8 statement, Sili- con Valley Bank said "client cash burn has remained ele vated and increased further in February." The bank said its What KPMG knew about the deposits at the end of February two banks financial situation were lower than it had pre- and what it missed will likely be dicted in January. the subject of regulatory scru tiny and lawsuits, KPMG signed the audit re- port for Silicon Valley Bank's parent, SVB Financial Group, on Feb. 24. Regulators seized the bank on March 10 after a surge of withdrawals threatened to leave it short of cash. "Common sense tells you that an auditor issuing a clean report, a clean bill of health, on the 16th-largest bank in the United States that within two weeks fails without any warn- ing, is trouble for the auditor," said Lynn Turner, who was chief accountant of the Securi- ties and Exchange Commis Failure's Fallout Both bank audits were for 2022, so suditors weren't scrubbing the banks' books for the time period when they ran into trouble. But auditors are supposed to highlight risks faced by the companies they audit. They are also supposed to raise important issues that occur after companies close their books and before the audit is completed. A spokesman for KPMG de clined to comment on the spe- cific audits, due to client confi- dentiality. In a statement, the firm said it isn't responsible for things that happen after an au dit is completed. Silicon Valley Bank's depos its peaked at the end of the first quarter of 2022 and fell $25 billion, or 13%, during the final nine months of the year. That means deposits were de- clining during the period of KPMG's audit. If the decline was affecting the bank's liquid- ity when KPMG signed off on the audit report, that informa- tion likely should have been in cluded. Since it wasn't, the question becomes, did KPMG know or should it have known what was going on? Auditors are supposed to warn investors if companies are in trouble. They are required to evaluate "whether there is sub- stantial doubt about the entity's ability to continue as a going concern" for the next 12 months after the financial statements are issued. Auditors also use their re- ports to highlight "critical audit matters" that involve challeng ing, subjective or complex judg ments. KPMG in that section of its report focused on the ac counting for credit losses at Sil- icon Valley Bank. But it didn't address Silicon Valley Bank's ability to continue holding debt securities to maturity-which, in the end, the bank lacked. Even if the bank wasn't Selloff of Bank Stocks Deepens struggling last year, KPMG was required to evaluate develop ments that occurred after the balance-sheet date so the com- pany's financials were pre- sented fairly. Signature Bank, which was seized by regulators on Sunday, also faced a run last week, but it didn't have the same balance- sheet issues as Silicon Valley Bank. KPMG signed off on its audit on March 1 KPMG said it isn't responsible for things that happen after an audit is completed. Signature's bet on the crypto industry led to a surge in de- posits, which went into reverse as that market struggled. A large amount of its deposits were uninsured, making it more likely the customers would flee at any sign of trouble. But it hadn't disclosed the same losses on its investments as Silicon Valley Bank, giving it a greater ability to pay depositors The auditing firm could face additional scrutiny. KPMG also Shares of regional banking companies, Including Comerica, KeyCorp, Truist and U.S. Bancorp, plummeted Monday, Large banks, including Wells Fargo and Citigroup, also fell, though not as sharply. audited First Republic Bank, whose shares were down 76% Monday morning, even after the bank got a liquidity boost from JPMorgan Chase and the Fed- eral Reserve. The shares closed down nearly 62% KPMG's audit work likely will be scrutinized by regulators, in cluding the Public Company Ac counting Oversight Board and the SEC, as well as private liti gants that lost money when Sili- con Valley Bank collapsed, said Erik Gordon, a professor at the University of Michigan's Ross School of Business. A share holder lawsuit against the firm concerning its Silicon Valley Bank audit "won't be an easy one for people to win, even though the timing is spectacu- larly embarrassing for KPMG," Mr. Gordon said. A PCAOB spokeswoman said the regulator "cannot comment on ongoing inspection or en- forcement matters. An SEC spokesman declined to com- ment on the Silicon Valley Bank audit. One argument KPMG could try in court is that the run on the bank started after the firm signed its audit report. A state banking regulator, the California Department of Financial Protec tion and Innovation, in a filling Friday said the bank was "in sound financial condition prior to March 9" when depositors withdrew $42 billion Douglas Carmichael, the PCAOB's chief auditor from 2003 to 2006, said it was un- clear how the California regula- tor could have determined the bank's financial condition. "It seems like a premature analysis. How could they know without examining?" he said. "Auditors are always under the microscope when the com pany fails shortly after the issu- ance of a clean opinion," Mr. Carmichael said. "The shorter the period, the greater the con- cern would have to be." Silicon Valley Bank almost doubled its assets and deposits during 2021. It got in trouble because it bought long-term, low-yielding bonds with short- term funding from depositors that was repayable upon de mand. Accounting rules said it didn't have to recognize losses on the assets as long as it didn't sell them. When rising interest rates caused the bonds' value to drop, it got stuck in them, and they kept falling. Silicon Valley Bank still had to maintain enough liquidity to pay with- drawals, which became increas ingly difficult. Frank Joined