In the article titled "Auditors Didnt Flag Risks Building Up in Banks" by Jean Eaglesham, published on April 10, 2023, the author discusses a critical issue in the auditing industry concerning the failure to identify and report significant risks in financial institutions, particularly in the case of Silicon Valley Bank.

KPMG LLP, a Big Four audit firm, issued an audit opinion for Silicon Valley Bank shortly before the bank's collapse. While the audit identified potential losses on loans as a "critical audit matter," it did not address the core issues that led to the bank's downfall, namely, its unrealized bond losses and its ability to hold these bonds given its reliance on potentially volatile deposits.

This situation highlights the introduction of critical audit matters by the Public Company Accounting Oversight Board (PCAOB) in 2017. These critical audit matters were intended to enhance audit reports by making them more informative for investors, shedding light on significant challenges, complexities, and subjective judgments made by auditors.

Silicon Valley Bank's unrealized bond losses appear to meet the criteria for a critical audit matter, but auditors did not include it as such. The bank's classification of bonds as "held to maturity" allowed it to keep losses off its books, a practice that gained prominence as interest rates rose, affecting balance sheets.

Smaller banks like Silicon Valley Bank, which rely heavily on deposits, face challenges in holding long-term assets indefinitely. In this context, the auditors' failure to address liquidity concerns and bond losses raises questions about the effectiveness of critical audit matters.

The article suggests that auditors may have missed important risk factors, potentially leading to litigation, and underscores the need for more comprehensive and effective auditing standards. The lack of critical audit matters related to these risks in other banks exposed to bond losses also raises concerns about the overall effectiveness of this auditing measure.