A 292-page report released this week by the minority staff of the U.S. Senate Permanent Subcommittee on Investigations sharply criticized Big Four accounting firm KPMG for issuing "unqualified" clean audit opinions for Silicon Valley Bank, Signature Bank, and First Republic Bank before their collapses in 2023.

The report also disclosed details of behind-the-scenes discussions between auditors and Silicon Valley Bank's CFO and another bank executive in the days before the bank run in March 2023, revealing the close relationship between the auditors and the bank.

According to a press release from Senator Richard Blumenthal (D-Conn.), these findings are the culmination of a 28-month investigation that reviewed more than 400,000 pages of documents and conducted nearly 100 hours of briefings and interviews with auditors and regulators. The highly critical PSI minority staff report on the audit industry features a quote on its title page: "THIS INDUSTRY IS A JOKE."

The report states: "KPMG was aware for years of problems at these banks that ultimately led to each bank's failure, but KPMG either ignored these concerns or rationalized them away, leaving depositors and investors unaware of the banks' poor bookkeeping, chaotic risk management, and other concerning practices."

KPMG pushed back against the report in an emailed statement to CFO Dive through a company spokesperson. "The minority staff report is a misleading and incorrect narrative that contradicts the findings of multiple investigations into these banks, none of which identified auditors as playing a role in the bank failures," KPMG claimed. "The minority staff report also contains errors and draws incorrect conclusions, often by omitting critical context."

Additionally, KPMG stated that the report demands auditors go beyond current U.S. Public Company Accounting Oversight Board (PCAOB) standards. "We perform our audits in accordance with the standards because that is our role in the financial system and what we are trained and resourced to do effectively. Going beyond audit standards and our professional competence would undermine the role of regulators, management, and boards in mitigating corporate risk."

The report itself acknowledges that "no regulatory assessment has indicated that KPMG played a role in these bank failures," and notes that the subcommittee takes no position on whether KPMG's audits of the three banks violated any audit standards.

But the report does assert that KPMG ignored known dangers at the three banks. It says that when completing audits as late as 14 days before the banks failed, KPMG failed to "acknowledge" at least six serious risk factors that could threaten Silicon Valley Bank's survival, although KPMG disputes the subcommittee's assessment of five of these conditions while acknowledging "documentation errors" related to the sixth.

Regarding the other two banks, the report says KPMG dismissed fraud allegations against Signature Bank and ignored its bookkeeping deficiencies, and failed to warn First Republic Bank about "going concern" risks it faced, nor did it question a financial report that did not disclose risks.

The report comes after a recent failed attempt by Republican lawmakers to abolish the PCAOB, the audit oversight body established after the Enron and WorldCom accounting scandals in 2001.

In contrast, the report asserts that the audit industry is "under-regulated" and needs reform, stating that the PCAOB "has been undermined by the entrenched audit industry since its inception."

The report also examines the close relationships between KPMG and these banks, noting that KPMG audited Silicon Valley Bank for 28 years, Signature Bank for 21 years, and First Republic Bank for 31 of its 34 years of existence.

Currently, no U.S. regulations limit the number of years an auditor can serve a client, but there has long been debate over whether auditor tenure should be restricted to prevent overly close relationships from compromising audit rigor.

The report states: "While the subcommittee's review did not find a direct causal link between KPMG's long and profitable relationships with Silicon Valley Bank, Signature Bank, and First Republic Bank and their respective audit outcomes, the apparent familiarity raises concerns relevant to the entire audit industry."

Tensions in the long-standing relationship between KPMG and Silicon Valley Bank emerged in January 2023, when the bank's audit committee chair emailed Silicon Valley Bank CFO Daniel Beck and KPMG's lead partner for Silicon Valley Bank to inform them that the board had decided to seek bids for a new auditor for the first time since KPMG began auditing the bank in 1994.

The partner then emailed another Silicon Valley Bank executive, who assured him that he personally had no issues with KPMG as auditor, but the board believed "for proper governance purposes, this is the right thing to do." In the same email thread, the bank executive then suggested KPMG sponsor a women's cycling team affiliated with him, with promotional materials showing sponsorship prices between $3 million and $4 million. The report says the bank collapsed before sponsorship negotiations concluded.

Additionally, on January 25, 2023, the KPMG partner said in another email that he "had some positive interactions via text with [Mr. Beck], and he and I intend to meet for a drink." The partner told colleagues that Beck wanted to either postpone the request for proposal (RFP) or cancel the proposal. The report says the partner and Beck ultimately met on January 27, 2023, at Blackhawk Country Club in Danville, California.

The report says that when asked what was discussed at the meeting, the partner told the subcommittee they "talked about the... high-quality audits we performed for Silicon Valley Bank."

Beck's attorney did not respond to requests for comment.