This crisis raised deep questions about the impact of fiscal and monetary policies adopted to curb inflation on the banking sector, particularly on small and medium-sized banks.
At the same time, she shed light on the “risk assessment” processes of these banks, both in terms of the role of internal risk assessment services, and the role played by external assessment companies. in order to alert on the reality of the risks faced by banks on the basis of their periodic financial statements and in the light of changing market conditions.
One of the main issues raised by the banking crisis in the United States concerns auditing companies, especially since a global company was a common factor for the three banks that suffered the collapse (Silicon Valley, Signature and First Republic Bank), which is KPMG International, which is one of the four largest audit firms in the world.
The greatest listener
According to a report by the British newspaper “Financial Times”, “the bankruptcies of the three banks since March have cast a shadow over the company as the largest auditor of the American banking sector…Questions have multiplied about the quality of his work and his independence in recent days, especially after the release of the Federal Reserve report.” On the collapse of Silicon Valley Bank and the forced sale of the First Republic.
The interesting thing is that with regard to the case of the three banks, the global auditing company issued to the financial statements of these banks a certificate of their financial soundness up to the end of February last (one month before the triggering of the banking crisis only) .
The report quotes a former adviser to the aforementioned company, Francine McKenna, as saying: “We need tough action to back up regulators’ ‘tough talk’ (referring to the pressures the company is currently facing and the heavy criticism she faces).
The former auditor, now an assistant professor of accounting at North Carolina State University, Keshia Williams-Smith, reportedly said: “(..) the question concerns the auditor’s own risk assessment and if it has the right auditing procedures.”
Thus, “an audit of KPMG’s work was likely to hinge on whether its staff were sufficiently independent of the banks they audited, whether they paid appropriate attention to red flags (indicating underlying risks ) and whether he had the appropriate skills to judge the quality of the financial statements in an environment that has been modified by the rise in interest rates”.
The company assesses 30 listed banks
And at a time when he warns that “the outflow of depositors’ money from American banks will inevitably lead to a banking crisis that could plunge the country and the world into a financial crisis similar to that which occurred in 2008”, Abou Bakr al-Deeb, a researcher in international relations and political economy, reports to the “Economy” site Sky News Arabia, until:
The American banking sector has experienced three bankruptcies in two months, which concern banks (Silicon Valley, Signature and First Republic Bank). They all have one thing in common: their financial statements have been audited by KPMG. The said banks obtained declarations of soundness of their financial solvency until the end of last February from the same group! The company audits the financial statements of a large group of banks in the American banking system, and it is the same that evaluates the accounts of banks such as “Wells Fargo”, “Citigroup”, “New York Mellon” and 30 other banks .
Data from Audit Analytics indicates that KPMG plays a unique role as an auditor for US banks and even audits a greater percentage of the country’s banking system than any other company.
Publicly listed banks paid the company more than $325 million in fees in 2021 (the latest year for which full data is available).
A testament to the company’s reputation and trust, its former employees are playing important roles in the banking industry (such as the appointment of Keisha Hutchinson, who was a senior partner in the company’s audit team, as as Head of Risk Management in 2021 at Singtecher Bank).
The role of audit firms
In the opinion of the CEO of the Center for “Quorum” Studies in London, Tariq Al-Rifai, the question in general is not related to KPMG alone, and he believes that in general it is not possible to rely or rely more on auditing companies in risk assessment for banks.
Al-Rifai says, in statements exclusive to “Sky News Arabia Economy”: “We are not talking about KPMG as a single company. All audit companies can follow the same direction, in terms of not getting into detailed points when auditing companies or banks, and so we see each period There are problems associated with auditing companies, on the basis that they do not intervene in many details and do not disclose the problems related to transparency.
KPMG previously said it was behind the Silicon Valley and Signature audits, but declined to comment more than once, citing “client data privacy”.
Al-Rifai continues: “But at the same time, we see the success of research companies such as Hindenburg, whose expertise or specialization is related to finding companies with problems and a lack of transparency. They have succeeded to disclose many of these companies, and we’ve seen the result in practice.”
But for audit firms, “it may not seem like this is what the investor expects in terms of detail, disclosure and transparency,” according to the CEO of the Quorum Center for Studies in London.
Weaknesses
The Fed’s latest report, released last week, revealed the extent of weaknesses in Silicon Valley’s risk management and internal audit functions, and what needs to be assessed by the company’s external auditors.
And the Financial Times report quotes a former PricewaterhouseCoopers associate, Jeffrey Johannes, who teaches auditing at the University of Texas at Austin, as saying it could raise questions about whether KPMG should report such failures to investors as material weaknesses. may affect financial results.
The PCAOB plans to again intensify inspections in the financial services sector.
He said last month that his review of the 2022 audits would focus on whether banks should be required to disclose more about liquidity risks and events between the end of the fiscal year and the release of the report. of auditing. He also announced that he would investigate whether auditors had the expertise required to oversee complex institutions.
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