Audits failed to spot cause of bank collapses: report

Audits by top accounting firms failed to identify the failing investments that brought down Silicon Valley Bank (SVB) and Signature Bank, The Wall Street Journal reported Monday.

Accounting giant KPMG completed its audit of SVB just two weeks before the bank collapsed. While the firm flagged potential losses on loans, it didn’t provide any warnings about the bank’s massive unrealized losses on Treasury bonds, which declined in value due to rising interest rates.

Those unrealized losses forced SVB to raise additional cash, prompting its tech and venture capitalist depositors to pull their money in a lightning-fast bank run. Regulators took the unprecedented step of protecting all deposits to stave off a crisis of confidence in the banking system. 

Experts told the Journal that SVB’s interest rate risk should have been classified as a “critical audit matter,” which the Public Company Accounting Oversight Board mandated in recent years to ensure investors get more detailed information about company books.

The Journal found that audits for nine other banks exposed to the most unrealized bond losses didn’t mention the issue in their financial statements for 2022. The audit of SVB will likely draw scrutiny from regulators and SVB shareholders who are suing the bank, the Journal previously reported.

Banks have increasingly opted for an accounting tactic in which they classify bonds as “held to maturity.” That makes it so they don’t have to record any losses on the investments, which saw their value plunge as rising interest rates drove up yields for new bonds.  

U.S. banks were sitting on $620 billion in unrealized losses at the end of 2022, according to the Federal Deposit Insurance Corporation. Still, regulators have insisted that banks are well capitalized enough to weather the storm.