Corporate finance experts, while focusing on the collapse of Silicon Valley Bank and seeking clues as to whether KPMG, one of the Big Four accounting firms, was negligent in identifying risks, noted two key dates. The event is the largest U.S. bank failure since 2008.

The first date is February 24, when the10-K filingcontaining KPMG's latest audit opinion was submitted, which was just about two weeks before the bank'scollapse on March 10.

Although KPMG did identify critical audit matters related to credit losses and unfunded loan commitments in its audit opinion and discussed them with the company's audit committee, according to a review of the filing, it did not warn of risks to the going concern status of SVB Financial Group, the bank's parent company.

The short time window between the audit opinion and the bank run immediately raised questions: Why did SVB's auditor fail to detect signs of its impending collapse just before it happened? This also evokes the dramatic events of Lehman Brothers' bankruptcy in 2008—although the accounting issues differed—whenErnst & Young's audit opinionfailed to issue a serious risk warning about the company's ability to continue as a going concern, according to Jack Castonguay, an accounting professor at Hofstra University in New York, who noted the opinion was issued about eight months before the bankruptcy.

The second key date, though less fitting the narrative of a social-media-accelerated collapse, is hidden in a line at the bottom of KPMG's report to SVB shareholders: "We have served as the company's auditor since 1994." The decades-long relationship between the bank and its auditor has reignited long-standing debates over whether auditor tenure should be limited to prevent overly close relationships from compromising audit rigor.

"I suspect that using the same auditor for a long time is not beneficial because auditors tend to follow the prior year's audit procedures: rolling forward workpapers," Kate Suslava, an assistant accounting professor at Bucknell University in Pennsylvania, wrote in an email responding to questions about the length of the KPMG-SVB relationship.

KPMG stands by its audit work

KPMG defended its work, including its role as auditor for Signature Bank in New York, which also failed two days after SVB's collapse. On Tuesday, KPMG's U.S. CEO Paul Knopp said at an event that the firm stands behind the reports it issued and believes it followed all professional standards,according to the Financial Times。

In an emailed statement, KPMG spokesperson Russ Grote said the firm had no specific comment on the SVB matter due to client confidentiality. But he insisted KPMG conducted its audits in accordance with professional standards, noting that audit opinions are based on evidence available as of and before the opinion date.

"Any unforeseeable events or management actions occurring after the opinion date cannot be anticipated in the audit," Grote said.

Castonguay wrote this week onLinkedIn, agreeing that KPMG's unqualified audit opinion for SVB was not a "real mistake." Although SVB faced customer concentration risk due to its many largest depositors being in the tech sector, he said that was not sufficient to warrant a so-called "GC" (going concern) opinion.

"The classic case taught in auditing courses is that if you sign an audit opinion on February 24 and the client's only factory burns down on February 25, your opinion is correct," he said in an interview. But he noted that unless audit workpapers become public—which typically only happens when auditors are sued—it is impossible to know what the auditor knew when preparing the audit.

KPMG's long tenure with SVB is not unusual. There are currently no U.S. regulations limiting the number of years an auditor can serve a client. The U.S. allows audit firms to remain indefinitely but requires rotation of the engagement partner every five years,CFO Dive previously reported。

According to Benedikt Quosigk, an accounting professor at Kennesaw State University in Georgia, KPMG rotated in a new "engagement partner" for SVB in 2021. Quosigk reviewed the relevantfilings。

Two views on firm rotation

U.S. regulators havelong consideredlimiting how long audit firms can serve a particular client, but concerns about the economic costs of forcing auditors out have generated significant pushback.

Audit tenure varies widely, with the average tenure for such engagements among Russell 3000 companies being 16.8 years, but a few "very long tenures skew the average higher," according to anAudit Analytics report dated February 3, 2022. For example, the report noted that Deloitte has served as Procter & Gamble's auditor since 1890.

There are two schools of thought on audit tenure—and when a fresh audit perspective is needed—Quosigk told CFO Dive. He has studied the impact of long tenure on audit independence.

"The view in the literature is that the longer the client relationship, the more you might start cutting corners, turning a blind eye, or covering up issues, or you might become so comfortable that you believe everything the client says because you like them too much," Quosigk said, but he added that he cannot determine whether that was the case with SVB.

The other view is that longer audit tenure helps build expertise because you know the client and its business better, so if faced with a complex business, the relationship might actually improve audit quality and reduce costs for the client, he said.

If mandatory auditor rotation regulations were implemented, some scholars say careful consideration is needed to determine a reasonable rotation frequency.

Erik Gordon, a professor at the University of Michigan's Ross School of Business, wrote in an email that fewer than seven years could add unnecessary costs to companies, but more than ten years would still fail to address potential issues. However, companies should be able to take steps to prepare so that the transition is as smooth as possible.

"There is something appealing about changing auditors on a fixed schedule, until the year of the change arrives," Gordon wrote. "No CFO is happy that year."