A new SVB Financial Group shareholder lawsuit filed Friday names KPMG as one of many defendants in the complaint, shining a light on the auditor’s report signed about two weeks before the bank failed which was “silent” on whether there was any doubt about its ability to continue operating as a going concern.
The proposed class-action lawsuit also named as defendants the bank’s then-top executives, including its CEO and CFO along with its board and four underwriters including Goldman Sachs, Bank of America and Morgan Stanley.
The suit asserts the bank’s officers, directors and KPMG deceived the investing public by making untrue statements or omitting material facts about the company that led certain shareholders to buy the stock at artificially inflated prices.
“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,” according to the complaint, filed in the U.S. District Court for the Northern District of California.
The suit, filed by Hialeah, Florida’s Employees’ Retirement System and two other retirement- or pension-related funds, is seeking unspecified damages for the bank’s investors between Jan. 22, 2021, and March 10, 2023, the day the Santa Clara, California-based bank was closed by regulators, marking the nation’s largest bank failure since 2008.
Whether Silicon Valley Bank could have held the securities to maturity is “certainly a complex question,” Martin Baumann, a former chief auditor at the Public Company Accounting Oversight Board, told The Wall Street Journal. “It was material to investors, and it is hard to see how liquidity was not a matter for discussion with the audit committee.”
The unrealized losses in Silicon Valley Bank’s bond portfolio appear to “meet every definition of a possible critical audit matter,” Baumann said.
The PCAOB introduced critical audit matters as a standard in 2017, and Baumann helped craft it.
“I’m not the auditor of the bank and I don’t know if [the bonds issue] should have been included in the auditor’s report,” Baumann told the Journal. “But as the lead author of the standard, this certainly is the kind of item that we had in mind for critical audit matters.”
Friday’s complaint is hardly the first connected to SVB’s failure. An earlier proposed class action was brought just three days after the bank’s collapse by a group of shareholders led by Chandra Vanipenta, which alleged SVB, CEO Greg Becker and CFO Daniel Beck concealed from investors the impact that high interest rates would have on the tech- and venture capital-focused bank’s business.
The latest complaint details some reporting in the financial press that has appeared to indicate the bank had been aware of its risks related to rising interest rates for some time.
The Washington Post reported April 2 that SVB executives were personally aware, as early as 2020, that SVB’s investment strategies “violated its own risk measures and exposed the bank to substantial issues in the event of higher interest rates,” the complaint noted.
The suit also cited a March 19 New York Times report that indicated the Federal Reserve Bank of San Francisco was aware of SVB’s risky practices for more than a year and had warned the bank of its problems.
Even prior to the lawsuit, the short window between the audit and the bank run raised questions of how SVB’s auditors could have missed the signs of its impending doom so close to the collapse.
KPMG has defended its work, and CFO Dive reported that a KPMG spokesperson wrote that the firm conducts its audits in accordance with professional standards and noted that audit opinions are based on evidence available up to and at the date of the opinion.
KPMG had partnered with SVB for 29 years, raising the specter of whether cozy auditor-client relationships can cut into the rigor of audits. Although there are no regulations in the U.S. that limit the number of years that auditors can provide their services to clients, U.S. regulators have long contemplated limiting how long auditors can do so.
A KPMG spokesperson declined to comment. Silicon Valley Bank did not immediately respond to a request for comment.
A Goldman spokesperson, in an emailed response to questions from CFO Dive, wrote that the firm believes the suit’s claims against it and other underwriters are without merit.
“We will vigorously defend against them in court,” the bank said.
Bank of America and Morgan Stanley didn’t return emails from Bloomberg on Friday seeking comment on the lawsuit.
Erik Gordon, a University of Michigan business professor, questioned how auditors could have downplayed SVB’s interest-rate risk — or missed it entirely.
“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,” Gordon told The Wall Street Journal.