KPMG Dismissed Red Flags at Regional Banks, Senate Review Finds

KPMG LLP dismissed financial warning signs at Silicon Valley Bank and two other regional banks before they collapsed in 2023, Senate Democrats found in a new report detailing what they see as critical gaps in auditor oversight.

KPMG issued clean audit reports for Silicon Valley Bank, Signature Bank, and First Republic Bank in the weeks before the lenders failed as rising interest rates slashed the value of capital the banks had available to cover steep customer withdrawals. Auditors told congressional investigators that it wasn’t their job to assess the lenders’ risky business strategies, according to the report that Democrats on a Senate Homeland Security and Governmental Affairs subcommittee released Wednesday.

KPMG took a narrow view of which threats could hit the banks’ financial statements, according to the lawmakers’ report. Lawmakers also challenged the firm’s decades-long tenure working with the three banks and found that a revolving door of employees between them strained the auditor’s objectivity.

KPMG called the report “a misguided and erroneous opinion that stands as an outlier from the multiple investigations that have been conducted on these banks, none of which point to an auditor role in the failures.” The firm, in a statement, said it adhered to US audit standards and stood by its audit opinions.

The report acknowledges that none of the regulator reviews of the bank failures suggested that the firm played a role. The lawmakers did not judge whether KPMG met US audit requirements in its audits of the three banks.

The congressional report recommended a slate of proposals to ensure the audit industry responds to market and governance risks that could sink stock values and topple companies, such as requiring companies to periodically hire a new auditor.

KPMG ignored signs that the three regional banks were “unstable” before issuing their audit opinions, Sen. Richard Blumenthal of Connecticut, the subcommittee’s top Democrat, said in a statement. The report “exposes KPMG’s willful blindness and stresses that significant reforms to the auditing industry are needed” to protect consumers, he said.

In the short-term, the Democrats’ report is unlikely to result in any meaningful action by the industry’s regulator, the Public Company Accounting Oversight Board. The Republican-led Congress attempted to dismantle the board earlier this year and the Enron-era regulator remains in limbo as the Securities and Exchange Commission prepares to name a new slate of board members.

Audits Under Spotlight

The report scrutinized KPMG’s audits for the three banks. Among the findings, the firm didn’t discuss interest rate risks with the board of Silicon Valley Bank despite auditors raising those risks among themselves.

KPMG also ignored ongoing risks as it evaluated Silicon Valley Bank’s ability to remain in business, the report said. These included a $15 billion drop in value for certain long-term assets, the departure of the bank’s risk officer, regulator concerns about the bank’s governance and risk management, and a steep drop in its stock price.

The auditor also didn’t share with First Republic’s board of directors concerns about assumptions underpinning the lender’s assessment that it would continue as a viable business over the next year, according to the report.

KPMG didn’t investigate whistleblower allegations of fraud involving Signature’s commercial real estate portfolio, among other problems that the report raised.

The report also described a revolving door between the firm and the three banks. Ten leaders and employees of the banks previously worked for KPMG, including the CEOs of First Republic and Signature banks. One KPMG staff member assigned to work on First Republic’s audit had previously worked at the bank.

KPMG, in its statement, argued that the lawmakers’ report suggests auditors should go beyond what US audit rules require, potentially undermining the role of regulators, corporate management, and corporate boards in countering risks.

Bank regulators cited mismanagement as the cause of the failures of SVB and Signature Bank and blamed First Republic’s management strategies. Reports from the regulators did not mention KPMG.

KPMG has rolled out a series of reforms meant to improve the quality of its audits after struggling for years to meet basic standards. The firm touted its latest published regulatory inspection after achieving its best outcome in 15 years.

New Tools Proposed

Congress should mandate that companies rotate auditors to guard against client relationships that could influence an auditor’s objectivity, the Democrats said. Currently, lead audit partners must step down after five years but the firm itself can continue working with the same company to vet its accounting for decades.

The Democrats recommended that lawmakers give the audit board other new tools to hold auditors accountable. For example, Congress should create a whistleblower office at the PCAOB to reward tipsters who provide details about auditor wrongdoing, the report said.

In addition, active enforcement cases involving audit violations should be made public sooner, the report from the Permanent Subcommittee on Investigations said.

When Congress created the PCAOB in 2002, lawmakers opted to keep enforcement probes and preliminary charges confidential—a move that protects auditor reputations if charges were dropped or dismissed. But investigations and appeals can leave the public in the dark for years after problems first surface.

“This deprives investors, audit committees, and corporate boards of critical information needed to evaluate auditor performance and accountability,” the report said.