On February 24, 2023, the auditing firm KPMG issued an unqualified (clean) opinion on the financial statements of SVB Financial Group (Silicon Valley Bank). Shortly after that, on March 10, SVB collapsed.

Should KPMG have been able to identify the risks that confronted SVB and its ability to continue operating? Under the auditing standards firms must follow, the issue of an entity’s ability to continue as a going concern must be assessed. Auditors are responsible for evaluating whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period, not to exceed one year, beyond the date of the financial statements being audited.

Specifically, Auditing Standard 2415 issued by the Public Company Accounting Oversight Board states,

“Continuation of an entity as a going concern is assumed in financial reporting in the absence of significant information to the contrary. Ordinarily, information that significantly contradicts the going concern assumption relates to the entity’s inability to continue to meet its obligations as they become due without substantial disposition of assets outside the ordinary course of business, restructuring of debt, externally forced revisions of its operations, or similar actions.”

In its Form 10-K filing with the Securities Exchange Commission, SVB identified many risks, including rising interest rates on its investment securities. For example, on page 22 of the 10-K they stated:

“For instance, increases in interest rates have resulted, and may continue to result in, decreases in the fair value of our AFS [Available-for-sale] fixed income investment portfolio and increases in the pricing frequency and proportion of interest-bearing deposits, while unrealized losses to our HTM [Hold-to-market] fixed income investment portfolio may, among other effects, make an acquisition of the Company more costly or less likely.”

In a lawsuit filed in federal court in San Francisco, the complaint said,

“Even though SVB’s deposits began to decline in 2022, falling $25 billion during the final nine months of 2022 and reducing SVB’s liquidity, KPMG did not identify risks associated with SVB’s declining deposits or SVB’s ability to hold debt securities to maturity in its report.”

Was KPMG wrong in not identifying a significant going-concern issue in its audit opinion, considering paragraph .04 of AS 2415, which says,

“.04 The auditor is not responsible for predicting future conditions or events. The fact that the entity may cease to exist as a going concern subsequent to receiving a report from the auditor that does not refer to substantial doubt, even within one year following the date of the financial statements, does not, in itself, indicate inadequate performance by the auditor. Accordingly, the absence of reference to substantial doubt in an auditor’s report should not be viewed as providing assurance as to an entity’s ability to continue as a going concern.”

This will be an interesting case to follow. Right now, I don’t have enough information to assess the extent of work KPMG did with the going-concern issue. For example, did the auditors specifically evaluate this issue and consider the risk concerns management identified in the 10-K filing with the SEC?

Stay tuned!