Just weeks before the collapse of Silicon Valley Bank (SVB) and Signature Bank, accounting firm KPMG signed off on both of the banks’ audits. These failures come as audit firms are increasingly in the crosshairs of the Securities and Exchange Commission (SEC).
Last year, SEC Chair Gary Gensler and Paul Munter, the SEC’s Chief Accountant, emphasized the need for improved accounting standards, increased auditor independence, and a renewed focus on ethical responsibilities.
Gensler said, “The work to improve auditing standards, coupled with rigorous enforcement of auditor’s professional and ethical requirements, is essential for investor protection.”
The SVB and Signature Bank collapse came only a few months after Munter raised concerns about accounting firms’ “professionalism.”
“One of the things that concern me with some of the missteps that have been taken by some large [accounting] firms over the last few years is it seems to indicate a deterioration in the level of professionalism of people in those firms,” said Munter. “And it isn’t just one firm, which worries me that there might be a decline overall in the level of professionalism.”
It is no coincidence that as Gensler and Munter repeatedly highlighted the critical role that auditors play in investor protection and investor confidence, the SEC levied the largest penalty ever imposed against an audit firm.
Last June, the SEC charged Ernst & Young LLP (EY) for cheating by its audit professionals on ethics exams required to obtain and maintain Certified Public Accountant (CPA) licenses, and for withholding evidence of this misconduct from the SEC’s Enforcement Division during the investigation. EY admitted the facts and agreed to pay a $100 million penalty and undertake extensive remedial measures to fix the firm’s ethical issues.
“This action involves breaches of trust by gatekeepers within the gatekeeper entrusted to audit many of our Nation’s public companies. It’s simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams of all things,” said Gurbir S. Grewal, Director of the SEC’s Enforcement Division. “And it’s equally shocking that Ernst & Young hindered our investigation of this misconduct. This action should serve as a clear message that the SEC will not tolerate integrity failures by independent auditors who choose the easier wrong over the harder right.”
The importance of ensuring auditors’ independence and a professional culture of ethical behavior in fulfilling their gatekeeper role cannot be overstated. Without that, investors will lack confidence in the health of the financial system. The cryptocurrency industry, in particular, is at a crossroads, as companies look to audit firms to provide comfort to investors, while investors struggle to find reporting they can trust. We only need to look at the collapse of FTX to see the impact of the lack of internal accounting controls and the lack of adequate independent oversight.
While we don’t know what the auditors saw or missed at SVB or Signature Bank, we do know independent auditors are one essential weapon to safeguard investors and keep the financial industry accountable. When auditors fail to detect or report problems, there are real-world financial consequences. Whistleblowers – especially people with inside knowledge–play an important role in protecting against fraud and market manipulation. Especially when auditors and other gatekeepers fail, whistleblowers are essential for shedding light on conduct that harms investors and the general public.