San Antonio CPA Society This is the local chapter of the Texas Society of CPAs. TSCPA is voluntary group separate from actually being a Texas CPA licensed by the State of Texas.
BKD In the last few years several local firms have been acquired, like the Hnake group, by national firms such as BKD.
Grant Thornton San Antonio Grant Thornton is one of the large national firms occupying the size ladder below the Big Four.l
Padgett Stratemann is now RMS As San Antonio becomes a bigger player in Texas Business, more national firms are entering this market. A national firm does not start from zero. RMS (http://rsmus.com/) purchased Padgett. This gives the buyer a large client base to start with. Typically the local partners have made a handsome profit on their time at the firm. But seeking to recoup the investment, the buyer typically raises fees knowing some business will be lost. RMS has re located from North Loop 410 to 1604 and 281. Renee Foshee, a tax expert with the firm, is the current SA CPA Society President.
Turner Cleveland PC Terry Cleveland has addressed our students. Two of our graduates are employed with at this firm.
weaver CPA Weaver is one of the largest Texas based Accounting Firms.
Hill and Ford CPAs Kim Ford has addressed our students. She has expanded her practice from tax and write up to forensic investigation and court testimony.
Fisher Herbst and Kemble P. C. Bruce Howard who was on our Business Advisory Council was the Officer Manger for this firm.
Ridout Barrett CPAs Tony Ridout has visited and addressed our students many times. We have placed graduates with Ridout for several years.
Financial Consulting Firms
Aventine Hill Partners, Inc. Beth Hair CEO founded Aventine in San Antonio in 2009. The firm now has offices in Dallas, Austin, San Antonio, and Houston. She formerly was with RGP.
Resource Global Professionals Susan Hough has been to campus and spoken to our students. She is the San Antonio Manager of RGP. RGP and Aventine are not CPA firms. Instead they offer contract specialists for firms needing specific tasks such as compliance or Controllerships.
Accounting Information
Acounting Today This is an independent site for accounting news regarding firms and current issues.
Certified Information Systems Auditor CISA Now that everything is literally on the computer and cyber security becomes a prominent issue, I see more and more accounting professionals with this designation. Previously known as the Information Systems and Audit Control Association, it now goes by the acronym ISACA.
Certified Fraud Examiner CFE The Association of Certified Fraud Examiners, located in Austin, TX by the way, offers this Certification.
Enrolled Agent EA The National Association of Enrolled Agents offers the EA exam for tax professionals.
Foreign Affairs :Published by the Council on Foreign Relations
Institute for the Study of War The Institute for the Study of War advances an informed understanding of military affairs through reliable research, trusted analysis, and innovative education. We are committed to improving the nation’s ability to execute military operations and respond to emerging threats in order to achieve U.S. strategic objectives. ISW is a non-partisan, non-profit, public policy research organization.
Stratfor This Austin, TX based site was begun by an ex Texas State Professor.
Silicon Valley Bank, Silvergate and "The Everything Bust" "The pressure on banks will rise"
By Elliott Wave International
The phrase "Everything Bust" means a bust in just about every financial risk-asset of which you can think, as well as the economy and, I dare say, the financial system itself.
Indeed, in a section titled "The Everything Bust Is on The Way," the December Global Market Perspective, a monthly Elliott Wave International publication which covers 50-plus financial markets, noted:
The pressure on banks will rise as the economy heads south.
And, now, we have these headlines:
Silicon Valley Bank Fails After Run on Deposits (The New York Times, March 10)
Crypto-focused bank Silvergate is shutting operations and liquidating after market meltdown (CNBC, March 8)
Silicon Valley's collapse was the biggest bank failure since Washington Mutual in 2008 and the second largest bank failure in U.S. history.
Many of those on Wall Street blamed the bank failures for triple-digit declines in the Dow Industrials on the day the news came out. However, the real "bust" in the Dow Industrials and S&P 500 began a year earlier, in January 2022. It reflected a downturn in a social mood; today's bank failures have the same roots that stretch back months and months. And since social mood is showing no signs of improvement, it's likely not over.
The "Everything Bust" is on -- in stocks, real estate, bonds, the world of crypto, SPACs (a.k.a. special purpose acquisition companies) and elsewhere in the world of finance, including the subprime auto market.
This chart and commentary are from the March Global Market Perspective:
The percentage of subprime auto borrowers who are at least 60 days late on payments surged to 6.05% in December, more than double the seven-year low of 2.58% recorded in April 2021, and eclipsing the peak reading of 5.7% during the Great Recession of December 2007 to June 2009.
As a March 10 New York Post headline said:
Silicon Valley Bank meltdown sparks contagion fears: 'We found our Enron'
Whether you want to call it "contagion fears" or the manifestation of an increasingly fearful mood, don't be surprised if more bank failures appear on the horizon sooner rather than later.
Also, don't be surprised if more triple-digit declines occur with the Dow Industrials.
The Elliott wave pattern of this senior U.S. index is revealing what very well may be next for U.S. stocks.
If you're unfamiliar with Elliott wave analysis, or simply need a refresher, read Frost and Prechter's Elliott Wave Principle: Key to Market Behavior. Here's a quote from the book:
Although it is the best forecasting tool in existence, the Wave Principle is not primarily a forecasting tool; it is a detailed description of how markets behave. Nevertheless, that description does impart an immense amount of knowledge about the market's position within the behavioral continuum and therefore about its probable ensuing path. The primary value of the Wave Principle is that it provides a context for market analysis. This context provides both a basis for disciplined thinking and a perspective on the market's general position and outlook. At times, its accuracy in identifying, and even anticipating, changes in direction is almost unbelievable. Many areas of mass human activity display the Wave Principle, but it is most popularly used in the stock market.
If you'd like to read the entire online version of this Wall Street classic, you may do so for free once you become a member of Club EWI, the world's largest Elliott wave educational community (around 500,000 worldwide members).
A Club EWI membership is also free and members enjoy complimentary access to a range of Elliott wave resources on investing and trading.
This article was syndicated by Elliott Wave International and was originally published under the headline Silicon Valley Bank, Silvergate and "The Everything Bust". EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
I served on the San Antonio Institute of Internal Auditors Board with Professor Dennis Elam. I am reaching out with an opportunity
for an enterprising student interested in an accounting internship. This is not your usual audit and tax firm, indeed read on.
We specialize in litigation support, business valuations and forensic accounting. We do quite a bit of marital dispute work and some civil litigation work.
Please reply directly to me with your interest and resume.
Imagine a bank in Houston that caters to the oil-and-gas industry. It makes low-cost loans with credit-friendly terms to unprofitable shale frackers on the condition that they hold their deposits exclusively at the bank, where they earn an above-market return. It also manages the wealth of oil and gas executives.
The bank uses its enormous deposits to fund more risky loans to frackers and acquire Treasury bonds and government mortgage-backed securities. The latter obscure the credit risk on its balance sheet. As frackers burn cash, the bank struggles to redeem deposits and has to sell assets at a loss.
As news of the losses spreads, there is a run on deposits. The Federal Deposit Insurance Corp., with the approval of a Republican president, takes over the bank and guarantees all its uninsured deposits, including those of oil-and-gas executives. Wouldn’t Democrats scream “bailout”?
This essentially describes what has happened at Silicon Valley Bank over the past week. Democrats insist the FDIC’s guarantee of uninsured deposits decidedly isn’t a bailout. The truth is that the Biden administration not only bailed out Silicon Valley investors and companies. It also rescued California, whose budget depends on them, and the state’s liberal political class. It did the same for New York by back-stopping uninsured deposits at Signature Bank.
Newsletter Sign-up
Morning Editorial Report
All the day's Opinion headlines.
California’s tax revenue has swelled—and is now falling—in tandem with Silicon Valley’s fortunes. As the Federal Reserve pumped trillions of dollars into the economy and cut interest rates to near-zero, the stock market surged. Investors sold stock in tech companies at inflated prices. Startups took advantage of the hot stock market to float public shares.
Investors plowed their capital gains into high-yielding accounts at SVB and startups with accounts at the bank. Between December 2019 and December 2022, its deposits tripled to $173 billion. SVB became Silicon Valley’s premier bank by offering generous loan terms and above-market returns on deposits to unprofitable companies, many with no revenue.
But as the Fed raised interest rates and tech startups burned through cash, SVB had to sell mortgage-backed securities at a loss to cover deposit redemptions. You know the rest of the story.
Normally, uninsured depositors—those with more than $250,000 in an account—would take a haircut of some 10% to 15% if a bank fails. But tech investors, California Gov. Gavin Newsom and Silicon Valley politicians lobbied the White House for help. Not guaranteeing uninsured deposits would “hurt the innovation pipeline” and “ordinary people,” claimed Silicon Valley Rep. Ro Khanna.
It’s true: Absent the FDIC bailout, startups would have had to raise more capital from venture investors to offset their losses. That may have proved difficult for less-promising enterprises, as investors refused to give more money while they tried to pare their own losses. But it likely wouldn’t have been a problem for the truly innovative firms.
And those with more than $250,000 in a bank account aren’t “ordinary” people. What has hurt ordinary people is the Fed’s inflationary policies. Why shouldn’t Silicon Valley have to bear some pain as the central bank corrects the ultra-loose monetary policies that enriched its technocratic class? Is Silicon Valley too important to lose money? As far as Mr. Newsom is concerned, the answer appears to be yes.
High earners in California’s Bay Area pay about half of state income tax. Capital-gains realizations surged to $245 billion in 2021 from $145 billion in 2019, helping create a more than $100 billion budget surplus last year. But stocks have plunged and tech layoffs are increasing, so California is staring down the barrel of a gaping deficit.
Tax revenue through the first eight months of this year is running $25 billion lower than last year. The budget carnage would be greater if investors had to write down their startup investments. No wonder Mr. Newsom, who reportedly had an account at SVB, praised the administration’s bailout’s “profoundly positive impacts on California.”
Meantime, SVB’s New York bailout companion, Signature, has received a bum rap as a crypto bank. But if most of its uninsured depositors were crypto companies, there’s no chance the FDIC would have bailed them out. Signature primarily caters to New York’s liberal special interests, which donate to Democratic campaigns.
It is New York City’s top lender to low-income housing developers and “a significant player when it came to financing for personal injury firms,” according to Law.com. One of its specialities was financing the purchase of taxi medallions. According to the New York Times, it was also known “for catering to wealthy families.” Former Gov. Andrew Cuomo has a campaign account at the bank.
Mr. Khanna insists that a bank catering to the oil-and-gas industry would be treated the same as SVB and Signature. But maybe the reason those two banks failed to manage their risks is their leaders knew they had political protection in case they got into trouble.
If the banking system is in such good shape why did a group of big banks need to deposit $30 B at First Republic? The better question is, where were the layers of Federal oversight as this unfolded? Just to name a few, the Comptroller of the Currency, the Treasury Dept. the FDIC, and the FED all failed to open the ‘window’ and flood Silicon Valley Bank with enough over night lending to meet the withdrawals? Worse, KPMG CPAs had issued ‘clean opinions’ on Silicon Valley, Signature Bank (note Barney Frank pocketed $2.4 M while on that board before the collapse) and First Republic? Ironically First Republic needed funds exactly 15 years to the day that Bear Stearns failed. What am I getting for my $31000 tax bill from the Federal Government?
The big picture is this. Interest rates rose from 1942 to 1981. By 1981 one could make double-digit returns on a safe CD, so why invest in stocks. The top in rates, low in bond prices reversed as Paul Volcker raised rates higher still, marking the peak for inflation. A final low in stocks occurred the next year 1982 an. The new bull market was born which lasted until November 2021- January 2022. Rates have risen sharply since the March 2020 low. And investors are slowly realizing stocks can go down and stay down as demonstrated by the ups and downs of this week. The reverse of 1982-1984 is now underway. Investors will be abandoning stocks for safer Treasury notes and CDs. A new bear market in stocks is underway.
Central banks have a universal solution for those companies with debt problems, take on more debt! The second largest bank in Switzerland, Credit Suisse, now trades at 25% of its book value. No one wants to buy the stock at that discount, so what to do? The Swiss Central Bank proposes to loan up to $54 M dollars. Who ever heard of anyone re-paying a $54 B loan? Credit Suisse lost the equivalent of its entire year net income, $5 B, on one client and has yet to recover. In my presentations on that Archegos financial disaster, I wondered to the audience, how many more Archegos deals are out there we don’t know about? We are finding out now.
Investors are exiting oil investments, Crude oil broke the $70 support, now trading at $66.42. This is also a sign of economic weakness, less demand for crude oil. The move to electric everything is over done. There is not enough grid and all these trucks,, planes, and ships are not going electric. Let’s watch for a coming low in the energy markets.
I mentioned Nustar NS which continues to fall in price, now yielding 10% dividend. Patience is needed waiting for a final low..
If the banking system is in such good shape why did a group of big banks need to deposit $30 B at First Republic? The better question is, where were the layers of Federal oversight as this unfolded? Just to name a few, the Comptroller of the Currency, the Treasury Dept. the FDIC, and the FED all failed to open the ‘window’ and flood Silicon Valley Bank with enough over night lending to meet the withdrawals? Worse, KPMG CPAs had issued ‘clean opinions’ on Silicon Valley, Signature Bank (note Barney Frank pocketed $2.4 M while on that board before the collapse) and First Republic? Ironically First Republic needed funds exactly 15 years to the day that Bear Stearns failed. What am I getting for my $31000 tax bill from the Federal Government?
The big picture is this. Interest rates rose from 1942 to 1981. By 1981 one could make double-digit returns on a safe CD, so why invest in stocks. The top in rates, low in bond prices reversed as Paul Volcker raised rates higher still, marking the peak for inflation. A final low in stocks occurred the next year 1982 an. The new bull market was born which lasted until November 2021- January 2022. Rates have risen sharply since the March 2020 low. And investors are slowly realizing stocks can go down and stay down as demonstrated by the ups and downs of this week. The reverse of 1982-1984 is now underway. Investors will be abandoning stocks for safer Treasury notes and CDs. A new bear market in stocks is underway.
Central banks have a universal solution for those companies with debt problems, take on more debt! The second largest bank in Switzerland, Credit Suisse, now trades at 25% of its book value. No one wants to buy the stock at that discount, so what to do? The Swiss Central Bank proposes to loan up to $54 M dollars. Who ever heard of anyone re-paying a $54 B loan? Credit Suisse lost the equivalent of its entire year net income, $5 B, on one client and has yet to recover. In my presentations on that Archegos financial disaster, I wondered to the audience, how many more Archegos deals are out there we don’t know about? We are finding out now.
Investors are exiting oil investments, Crude oil broke the $70 support, now trading at $66.42. This is also a sign of economic weakness, less demand for crude oil. The move to electric everything is over done. There is not enough grid and all these trucks,, planes, and ships are not going electric. Let’s watch for a coming low in the energy markets.
I mentioned Nustar NS which continues to fall in price, now yielding 10% dividend. Patience is needed waiting for a final low..
EWI has commented that the solution to companies with too much debt (25% of russell 2000 stocks cannot meet debt payments) is
sure enough, more debt
that thought crossed my mind in reading on yahoo finance, goldman heightens chances of recession and specifically how CS is saved
that's great if the swiss central bank is now a shareolder in CS and CS does not have to re pay the loan, otherwise I don't see how this works
this is the sort of thing I want too mention in the upcoming podcast, Bob went out of his way to to make this point in the llast few EWT
has anyone ever paid off a $54 B loan?
dennis
Credit Suisse (CS) shares have seen two days of extreme volatility on rising fears of its survival. The investment bank said late Wednesday it would borrow up to $54 billion from the Swiss central bank to shore up investor confidence.
We recently listed an Internal Audit Intern position with Clear Channel Outdoor. Unsure if you have any contacts that you might be interested in sharing this with, but I informed my team that I would pass it around. Happy to answer questions if you have any.
That giant slurping sound on Friday was Silicon Valley Bank imploding. America’s 16th-largest bank had some $175 billion in deposits and disappeared by breakfast. It wouldn’t have happened if not for management mistakes. This was a 21st-century bank run—customers tried to withdraw about $42 billion, a quarter of all deposits. But what triggered the collapse?
Let’s go back. In January 2020, SVB had $55 billion in customer deposits on its balance sheet. By the end of 2022, that number exploded to $186 billion. Yes, SVB was a victim of its own success. These deposits were often from initial public offerings and SPAC deals—SVB banked almost half of all IPO proceeds in the last two years. Most startups had relationships with the bank.
That’s a lot of money to put to work. Some was lent out, but with soaring stock prices and near-zero interest rates, no one needed to take on excessive debt. There was no way SVB was going to initiate $131 billion in new loans. So the bank put some of this new capital into higher-yielding long-term government bonds and $80 billion into 10-year mortgage-backed securities paying 1.5% instead of short-term Treasurys paying 0.25%.
This was mistake No. 1. SVB reached for yield, just as Bear Stearns and Lehman Brothers did in the 2000s. With few loans, these investments were the bank’s profit center. SVB got caught with its pants down as interest rates went up.
Newsletter Sign-up
Morning Editorial Report
All the day's Opinion headlines.
Everyone, except SVB management it seems, knew interest rates were heading up. Federal Reserve Chairman Jerome Powell has been shouting this from the mountain tops. Yet SVB froze and kept business as usual, borrowing short-term from depositors and lending long-term, without any interest-rate hedging.
The bear market started in January 2022, 14 months ago. Surely it shouldn’t have taken more than a year for management at SVB to figure out that credit would tighten and the IPO market would dry up. Or that companies would need to spend money on salaries and cloud services. Nope, and that was mistake No. 2. SVB misread its customers’ cash needs. Risk management seemed to be an afterthought. The bank didn’t even have a chief risk officer for eight months last year. CEO Greg Becker sat on the risk committee.
As customers asked for their money, SVB had to sell $21 billion in underwater longer-term assets, with an average interest rate around 1.8%. The bank lost $1.8 billion on the sale and tried to raise more than $2 billion to fill the hole.
The loss flagged that something was wrong. Venture capitalists, including Peter Thiel, suggested that companies in their portfolios should withdraw their money and put it somewhere safer. On Thursday the dam broke and there was no way to cover billions in withdrawal requests.
Mistake No. 3 was not quickly selling equity to cover losses. The first rule of survival is to keep selling equity until investors or depositors no longer fear bankruptcy. Private-equity firm General Atlantic apparently made an offer to buy $500 million of the bank’s common stock. Friday morning, I’d have offered $3 billion for half the company. Where was Warren Buffett? Or JPMorgan?
Before they could get a deal together, the Federal Deposit Insurance Corp. took over to protect up to $250,000 for each depositor. Larger, uninsured deposits are frozen. Since the bank took a 9% haircut on the $21 billion in bond sales, that could mean uninsured depositors might get 90 cents on the dollar, but it could take months or years. So venture capitalists are getting emergency funding requests.
Why did so many startups bank with SVB in the first place? Here’s a hint. Apparently, more than half of SVB’s loans went to venture and private-equity firms backed by the borrower’s limited-partner commitments, a legal but slippery way to goose venture funds’ all-important internal rate of return metric, IRR, by investing three to six months before calling investors for cash. VCs are very persuasive with startups.
Here’s an important lesson for companies in trouble: On Thursday, Mr. Becker told everyone to “stay calm.” That never works, ever since Kevin Bacon’s character in “Animal House” told everyone, “Remain calm. All is well,” as chaos ensued.
Was there regulatory failure? Perhaps. SVB was regulated like a bank but looked more like a money-market fund. Then there’s this: In its proxy statement, SVB notes that besides 91% of their board being independent and 45% women, they also have “1 Black,” “1 LGBTQ+” and “2 Veterans.” I’m not saying 12 white men would have avoided this mess, but the company may have been distracted by diversity demands.
Management screwed up interest rates, underestimated customer withdrawals, hired the wrong people, and failed to sell equity. You’re really only allowed one mistake; more proved fatal. Was management hubristic, delusional or incompetent? Sometimes there’s no difference.
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.
What KPMG knew about the two banks’ financial situation and what it missed will likely be the subject of regulatory scrutiny and lawsuits.
, 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 warning, is trouble for the auditor,” said Lynn Turner, who was chief accountant of the Securities and Exchange Commissionfrom 1998 to 2001.
Two crucial facts for determining whether KPMG missed the banks’ problems are when the bank runs began in earnest and when the bank’s management and KPMG’s auditors became aware of the crisis.
What is known about Silicon Valley Bank is that deposit outflows accelerated last month. In its March 8 statement, Silicon Valley Bank said “client cash burn has remained elevated and increased further in February.” The bank said its deposits at the end of February were lower than it had predicted in January.
Both bank audits were for 2022, so auditors 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 declined to comment on the specific audits, due to client confidentiality. In a statement, the firm said it isn’t responsible for things that happen after an audit is completed.
Silicon Valley Bank’s deposits 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 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 likely should have been included. 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 substantial 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 reports to highlight “critical audit matters” that involve challenging, subjective or complex judgments. KPMG in that section of its report focused on the accounting for credit losses at Silicon 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 struggling last year, KPMG was required to evaluate developments that occurred after the balance-sheet date so the company’s financials were presented fairly.
, 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.
Signature’s bet on the crypto industry led to a surge in deposits, 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.
A Silicon Valley Bank branch in Wellesley, Mass., before opening on Monday morning. Photo: Steven Senne/Associated Press
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.
What KPMG knew about the two banks’ financial situation and what it missed will likely be the subject of regulatory scrutiny and lawsuits.
, 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 warning, is trouble for the auditor,” said Lynn Turner, who was chief accountant of the Securities and Exchange Commissionfrom 1998 to 2001.
Two crucial facts for determining whether KPMG missed the banks’ problems are when the bank runs began in earnest and when the bank’s management and KPMG’s auditors became aware of the crisis.
What is known about Silicon Valley Bank is that deposit outflows accelerated last month. In its March 8 statement, Silicon Valley Bank said “client cash burn has remained elevated and increased further in February.” The bank said its deposits at the end of February were lower than it had predicted in January.
Both bank audits were for 2022, so auditors 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 declined to comment on the specific audits, due to client confidentiality. In a statement, the firm said it isn’t responsible for things that happen after an audit is completed.
Silicon Valley Bank’s deposits 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 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 likely should have been included. 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 substantial 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 reports to highlight “critical audit matters” that involve challenging, subjective or complex judgments. KPMG in that section of its report focused on the accounting for credit losses at Silicon 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.
President Biden Addresses Turmoil in the U.S. Banking System
You may also like
President Biden Addresses Turmoil in the U.S. Banking SystemPlay video: President Biden Addresses Turmoil in the U.S. Banking System
President Biden said the banking system is safe in remarks on Monday, aiming to shore up confidence in the financial system. The remarks come just days after Silicon Valley Bank collapsed after a run on deposits. Photo: Evelyn Hockstein/Reuters
Even if the bank wasn’t struggling last year, KPMG was required to evaluate developments that occurred after the balance-sheet date so the company’s financials were presented fairly.
, 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.
Signature’s bet on the crypto industry led to a surge in deposits, 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.
KPMG’s audit work likely will be scrutinized by regulators, including the Public Company Accounting Oversight Board and the SEC, as well as private litigants that lost money when Silicon Valley Bank collapsed, said Erik Gordon, a professor at the University of Michigan’s Ross School of Business. A shareholder 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 spectacularly embarrassing for KPMG,” Mr. Gordon said.
Live Q&A
What Does the Silicon Valley Bank Failure Mean?
The Journal’s Banking Editor Marie Beaudette sat down with former FDIC Chair Sheila Bair to discuss the SVB bank failure, subsequent regulatory action and what this all means for the tech sector and overall health of the U.S. economy.
Watch the Conversation
A PCAOB spokeswoman said the regulator “cannot comment on ongoing inspection or enforcement matters.” An SEC spokesman declined to comment 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 Protection and Innovation, in a filing 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 unclear how the California regulator 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 company fails shortly after the issuance of a clean opinion,” Mr. Carmichael said. “The shorter the period, the greater the concern 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 demand. 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 withdrawals, which became increasingly difficult.
The $1.8 billion investment loss Silicon Valley Bank disclosed last weekstemmed from Silicon Valley Bank’s decision to sell all its “available for sale” securities during the first quarter. Silicon Valley Bank didn’t say when it started or when it completed the sales. It isn’t clear if Silicon Valley Bank used the proceeds of those sales to help cover withdrawals.
In the March 8 disclosure, Silicon Valley Bank said it expected to reinvest proceeds from the sales. But money is fungible, and it is unclear if selling the available-for-sale securities may have freed up other sources of cash to help pay departing customers.
Newsletter Sign-up
Markets A.M.
A pre-markets primer packed with news, trends and ideas. Plus, up-to-the-minute market data.
Most of the capital hole in Silicon Valley Bank’s balance sheet was in government-sponsored mortgage bonds that Silicon Valley Bank classified as “held to maturity.” That label allowed Silicon Valley Bank to exclude unrealized losses on those holdings from its earnings, equity and regulatory capital.
In a footnote, Silicon Valley Bank said the fair-market value of its held-to-maturity securities was $76.2 billion as of Dec. 31, or $15.1 billion below their balance-sheet value. The fair-value gap was almost as large as Silicon Valley Bank’s $16.3 billion of total equity—which, KPMG could point out, is something anyone reading the financial statements could have seen.
Silicon Valley Bank stuck to its position that it intended—and had the ability—to hold those bonds to maturity. KPMG allowed the accounting treatment. Now it will be up to the Federal Deposit Insurance Corp. to sell the securities.
The bank’s troubles put KPMG in a no-win situation. If it had called attention to Silicon Valley Bank’s falling 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 will face questions about how it missed the signs that the bank was headed for trouble.
One of the agencies likely to ask pointed questions of KPMG is the FDIC. After a bank fails, the FDIC’s Office of 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 studied carefully by private litigants eyeing defendants to sue for damages. On that front KPMG caught a break over the weekend: The government said it would backstop all of both banks’uninsured depositors, in effect helping to bail out KPMG as well. The backstop won’t affect losses suffered by the banks’shareholders.
