SVB Quietly Deleted Rate-Risk Metric as Auditor KPMG Stayed Mum

For 10 straight years, Silicon Valley Bank offered financial statement readers two metrics to show how interest rate fluctuations would affect its bottom line.

But executives at the Santa Clara, Calif.-based bank told a different story in the year-end 2022 financial statement issued just 14 days before the lender’s March 10 collapse. The bank quietly removed one of those disclosures, deleting the metric that was expected to show a bleak picture of the bank’s financial health as it grappled with spiking rates and fleeing depositors.

SVB’s Feb. 24 10-K, it’s last, offers no explanation as to why the bank removed the risk disclosure—known as economic value of equity, or EVE—from the section of the statement where management discusses market risks. By extension, its auditor, KPMG LLP, was silent, too. The omission raises questions about whether the auditor should have flagged the inconsistency or encouraged the bank to keep both disclosures intact.

At a minimum, auditors need to ask questions when a company makes such a big change in its disclosures, even those that aren’t technically part of the audited financial statement, said Dane Dowell, an audit consultant and former inspections specialist for the Public Company Accounting Oversight Board.

“For them to do it for 10 years and then drop it, and then a couple of weeks later happen to collapse? There’s something to it,” Dowell said. “As an auditor, you should be asking questions. ‘Why did you remove this?’ Ten years in, you don’t just take something out randomly. There’s conscious choice there.”

KPMG declined to comment on SVB’s disclosure changes, citing client confidentiality. “The firm continues to stand by its audits, which were conducted in accordance with the professional standards,” a spokesperson said.

Representatives of SVB, which is under FDIC receivership didn’t respond to a request for comment.

Key Risk

Managing the risks posed by interest rate fluctuations is central to the business of banking. In the unaudited management section of their financial statements, financial institutions typically offer two different interest rate risk scenarios, in which they show the impact of rates moving up or down by certain percentages.

One disclosure, called net interest income sensitivity, captures net income fluctuations, but omits gains and losses on the assets a bank expects to sell or hold onto for the long term. The second disclosure, economic value of equity, shows how interest rates impact all assets and liabilities, including so-called available-for-sale securities and those that a bank intends to hold until maturity, said Justin Duff, vice president of corporate financial planning and analysis at Fannie Mae, who has written about SVB’s disclosure omission.

The held-to-maturity bucket is where SVB ran into trouble. The bank had piled much of its extra money from its startup-heavy customers flush with venture capital funding into what it considered safe, long-term holdings such as government- and agency-issued mortgage-backed securities. When interest rates spiked, though, the value of those low-interest assets plummeted. By the end of 2022, SVB’s long-term holdings were under water—on paper—by $15.1 billion.

The problem was exacerbated by its concentrated business model and a large proportion of uninsured, high-dollar deposits. Two days before its ultimate collapse, SVB announced that it needed to raise money, and spooked customers pulled out their cash.

The economic value of equity analysis might have offered one more warning about the growing risks around the bank’s long-term assets, Duff said, but analysts didn’t see it because the bank quietly deleted it.

“In retrospect, that’s the risk that ultimately proved to be one of the main causes of the shutdown of the bank,” Duff said. “That disclosure disappearing entirely after showing a substantial portion of the company’s value suffering in a rising rate environment would be a pretty red flag.”

Auditor Duties

Auditors don’t technically audit the management section of the financial statement, where banks offer these forward-looking risk disclosures. But the auditors do review the section for inconsistencies or misleading information.

It’s impossible to know what SVB’s auditors asked management behind closed doors. The KPMG audit team very well could have questioned the disclosure omission or raised the issue with the bank board, audit experts said.

“We don’t know their conversation, but they should have at least questioned management, and it should have been a red flag,” said Steven Mintz, accounting professor emeritus at California Polytechnic State University and the author of several accounting ethics books. “They lacked due care, as best as I can tell.”

If the auditors did ask questions, they likely satisfied their duties for reviewing the management section, said Brandon Gipper, associate accounting professor at Stanford Graduate School of Business.

“Auditors, because of the nature of their engagement and mindset, and what they would actually get penalties and litigation for doing, are essentially all focused around the financial statement,” Gipper said. “They’re looking at MD&A if there’s financial statement numbers there and making sure they connect to each other. But otherwise, it’s the purview of the company and you kind of leave it alone.”

Furthermore, auditors are required to assess whether there are material changes in a company’s financial statements from year to year, but materiality doesn’t cover what-if scenarios, said Bruce Pounder, founder of GAAP Lab, an accounting advisory firm.

“The reality of the financial system that we have is reporting entities have enormous discretion to deprive users of the financial statements of really important information,” Pounder said.

“If SVB wanted to disclose it for 10 years, great,” he said. “If they wanted to stop, they get to. That’s the way the system works.”