Auditors from KPMG LLP didn’t flag the significant material risks that took down Silicon Valley Bank just two weeks before the bank’s collapse, according to a new report in the Wall Street Journal.
While KPMG did find that potential losses from loans were a “critical audit matter”—information that has significant impact on the financial statements—the firm’s auditor did not identify the unrealized bond losses as such.
“The auditors failed to mention the fire in the basement or the box of dynamite on the first floor, but they did point out the peeling paint on the flower box,” Erik Gordon, a University of Michigan business professor, told the Wall Street Journal. “How could they miss the interest-rate risk?”
Auditors have been required to include critical audit matters in their audits since 2017. The WSJ found that critical audit matters have not flagged the issues that led to “a collapse of confidence among depositors and investors” in banks across the country.
However, Dennis McGowan, vice president of professional practice at the Center for Audit Quality, told the WSJ that auditors can’t predict every scenario that would make an issue a critical audit matter.
Auditors are under increasing pressure to improve the quality of their audits. In December 2022, the Public Company Accounting and Oversight Board (PCAOB) issued a report that found “a collective increase in the number of audits with deficiencies” including, among other things, leaving out critical audit matters.
The PCAOB recommended that audit firms bring in outside experts to help identify critical audit matters, expand the use of audit technology, and build communication tracking systems to improve the quality of audits.—DA
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