U.S. Sen. Richard Blumenthal (D-CT), ranking member of the U.S. Senate Permanent Subcommittee on Investigations (PSI), issued a report on the subcommittee’s probe into KPMG’s audits of three major banks prior to their collapse.
The report wraps up a 28-month investigation into KPMG’s unqualified audits of Silicon Valley Bank, Signature Bank, and First Republic Bank – all three of which collapsed in 2023.
Overall, the investigation revealed that KPMG had been aware for years of the problems that precipitated each of the banks’ eventual failures.
“KPMG ignored the warning signs that Silicon Valley Bank, Signature Bank, and First Republic Bank were unstable — justifying their patterns of risky and questionable decisions to issue clean audits in the days leading up to their failures,” said Blumenthal. “Our PSI report exposes KPMG’s willful blindness and stresses that significant reforms to the auditing industry are needed to promote transparency and better protect consumers.”
PSI’s investigation spanned over 400,000 pages of documents and nearly 100 hours of briefings. It also included transcribed interviews with auditors and regulators.
“No regulatory assessment suggested that KPMG played a role in the failures of the banks, and the Subcommittee does not take a position regarding whether KPMG’s Audits of Silicon Valley Bank, Signature Bank, and First Republic Bank did or did not violate auditing standards, as currently exist,” the report says. “However, PSI’s investigation reveals the extent to which auditors can be aware of deep flaws within an institution long before they are disclosed, or otherwise apparent to the public.”
Here are some of the key findings:
- KPMG had years-long awareness of the problems at the banks that precipitated each bank’s eventual failure, but either ignored or justified these concerns. This left the depositors and investors unaware of the banks’ deficient recordkeeping, troubled risk management, and other practices deemed concerning.
- The auditing industry is significantly underregulated and in need of reform. Further, the agency charged with regulating the auditing industry, the Public Company Accounting Oversight Board, has been undermined by the auditing industry, the report said. In practice, auditors create their own standards and follow their own rules.
- The 2023 bank collapses harmed thousands of people. The report points out that KPMG has not faced meaningful consequences for how it conducted these audits, highlighting the need for Congressional action.
The subcommittee report also includes several recommendations for reforming how independent auditors are regulated. Among them, the report says:
- Congress should require increased competition for audit firm engagements to enhance auditor independence, reduce the likelihood of a conflict of interest, and promote an object evaluation unencumbered by longstanding relationship biases.
- Congress should clarify that it is entitled to receive inspection information regarding auditing firms. Current ambiguity in the Sarbanes-Oxley Act prevents Congress from accessing information from the PCAOB regarding its inspections. Congress should remove this ambiguity and clarify that the PCAOB must produce inspection information to Congress upon request.
- Congress should require enforcement actions in the auditing industry be made public. The confidentiality provisions in the Sarbanes-Oxley Act impose strict limits on what the PCAOB can disclose about its oversight of audit firms.
- Congress should create an Office of the Whistleblower to provide actionable information regarding auditors. This office would expand whistleblower incentives that would provide more accountability to the auditing industry, increase transparency, and provide greater investor protection.