What Happened to Silicon Valley Bank, and What’s Next?

Key Takeaways

The collapse of Silicon Valley Bank and the ripple effects have left us with so many questions. Catherine and Steve sit down with former auditors Ernest Anunciacion and Josh Gertsch to try to answer them all. Let’s dive in:

Season 4, Episode 19: What Happened to Silicon Valley Bank, and What's Next? | Transcript

Steve Soter: I'm not sure companies either have the muscle memory or whatever to be thinking about, hey, wait, holy cow, we've got all these low-yield investments here. The Fed is just, you know, skyrocketing interest rates. And I hey, that's going to have an impact. 

Josh Gertsch: I'm not sure that the Fed isn't like causing part of the problem, quite frankly. 

Steve: Hello, and welcome to Off the Books, where we surf the uncharted waters of accounting, finance, risk, and wherever else the waves take us. This episode is brought to you by Workiva, the one platform that brings together financial reporting, ESG, audit, and risk teams so your organization can better manage times like never before. My name is Steve Soter, accounting enthusiast and Diet Coke aficionado. Looking forward to debiting a great conversation and I'm so happy to have you with us. Joining me, as always, is Catherine Tsai. Catherine, could you please tell the fine folks who you are? 

Catherine Tsai: I'm not an accountant or Diet Coke aficionado, but I like asking questions. And I have so many questions about what's been happening with Silicon Valley Bank and all of the ripple effects. 

Steve: Well, there is certainly a lot to talk about. And we actually have been having plenty of internal conversations. To that end, we've got former podcast guest Josh Gertsch as well as Ernest Anunciacion. So we thought, hey, why don't we get them two together, get you and me together, and let's just hash this out. 

Catherine: Perfect. 

Steve: Now to get us started. Josh, do you mind reminding the listeners who you are? 

Josh: Yeah, so I'm a former practitioner. I was an auditor for about 10 years with one of the Big Four accounting firms. And then I've spent time as a controller, director of FP&A, a director of finance, and a number of those roles. 

Steve: Well, again, thank you for joining us, Josh. Ernest, do you mind introducing yourself? 

Ernest Anunciacion: Yeah, not at all. Hey, everyone. Ernest Anunciacion, former chief audit executive. I have about 15 years of experience. Dating myself, I started my career when Sarbanes-Oxley came in the fold back in 2002. So done everything from building internal teams from scratch, building controls environments, enterprise risk management, all things GRC. 

Steve: And now to join this podcast, really the pinnacle of your career, Ernest, I'm sure. 

Ernest: It's always a cherry on top. Absolutely. 

Catherine: Well, Steve, why don't we start off. Can you give us kind of the quick and dirty summary of how Silicon Valley Bank is in the news and what happened? 

Steve: Sure. Yeah. And I am going to oversimplify. I'm going to miss all kinds of important details, but I do think it's important just to level set. So as I understand it, about the end of February, Silicon Valley Bank was informed that their credit agency, Moody's, was considering a downgrade. SVB, Silicon Valley Bank, obviously knew that that would have pretty serious, potentially catastrophic, outcomes like a bank run. So they naturally went to raise some capital, right, in order to bolster their balance sheet just a little bit. And a lot of this had to do, maybe not completely, but a lot of it had to do that Silicon Valley Bank had invested in bonds that were yielding relatively low interest rates. This would have been, you know, years ago in the past. And they were holding those to maturity. Well, as everybody knows, interest rates today are a lot higher than they used to be, which means that the value of those bonds and the yields that they were producing weren't particularly good. That probably had a lot to do, I would assume, with the downgrade. Anyway, Silicon Valley Bank went to go raise some more capital through a lot of, I think, missteps, miscommunications, and so forth that did not particularly go well. As a result of that, a lot of private equity holding companies got really concerned about their portfolio companies who had capital at Silicon Valley Bank, concerned that, hey, you know what, maybe there might be a run on the bank. And in a bit of a self-fulfilling prophecy, they asked people to pull their money. And that's actually what caused basically the bank failure. Important to us and important to this conversation is that roughly two weeks or so before all of this happened, Silicon Valley Bank got a clean audit opinion from their Big Four external auditors. And so naturally, one of the questions that we were talking about behind the scenes is did something go wrong with the audit? Why wouldn't they have known about this? So, in a nutshell, Catherine, that's how I understand it. 

Catherine: All right. Yeah. So where did your heads go first after you heard the news? 

Ernest: How the hell did this happen? And what could have been done to prevent it? I mean, we don't know all the facts yet, and I'm sure that will come out, and there's got to be an investigation. But I think what the Fed is most concerned about right now is just access to that cash. 

Josh: A couple of things on my end. I mean, at first I thought it came out, and then shortly after, there was a lot of publicity around the auditors missing it. And, you know, at first I was like, well, there's going to be some scrutiny there. There's, you know, there's a lot of things going on where auditors are under a lot of scrutiny for missing things. And, you know, at first I was like, well, they missed something. You can't have an audit opinion, you know, two weeks ago and not evaluate things through that audit opinion. But honestly, in going back and looking at the filings, I'm not sure the auditors, honestly, I think they probably disclosed everything appropriately. I'm not saying there won't be scrutiny. I'm not saying they're not going to get fined somehow. There's a lot of political agendas where, you know, I think regulatory agencies will try and hang the auditors a little bit for it. But like, honestly, they talked about the fundraising. They talked about that that's typical. They talked about how they looked at trends to come up with that. That would be like a sustainable approach. So like apart from predicting the future, and I mean, this thing kind of came unraveled in a couple of days. A couple of things shifted in the market, and it was like the perfect storm of three or four things hitting all at once. And I think historical trends, which is kind of what the auditors say, that would have been almost—the possibility of that happening would have been remote and always assessed as remote. So I don't know that there'll be anything with the auditors, like they'll get investigated. There'll be a lot of like due diligence on that, and there will probably be something. There'll be a slap on the hands somehow I'm sure. I think that's more political than anything at this point. But you know, honestly, everything in those filings, like that risk was laid out. I mean, it was disclosed. So I guess the real question is, OK, not the auditors' fault. It's not in the financials. It's not like the investors knew. It's more of like what caused this thing to happen. You know, it was a self-fulfilling prophecy. Everyone did do a bank run and all this stuff. So I think it's more about, you know, how like from an operational standpoint, how they should have covered it or what could have been done there to prevent it. 

Steve: And I think, Josh, you and I were actually talking hypothetically. Had the auditors asked Silicon Valley Bank to disclose more than they did—I mean, we were kind of going back and forth like, why would you disclose that? Right? I mean, if you assess it as remote, even if you're doing that out of conservatism, even that disclosure itself might have caused the very problem that you had previously assessed as remote. I mean, you're kind of in a bit of a lose-lose situation if you were Silicon Valley Bank. There were a few indicators, though, that a couple of things might be right, including that insider trading by the CEO. I may not call it insider trading, but, I mean, he unloaded a bunch of stock just before all of this happened.

Catherine: It was very convenient timing on that. And Steve, just to add to what you said, it sounds like there were questions raised several months ago about whether Silicon Valley Bank was putting itself at risk by mostly focusing on tech customers. Everybody saw that interest rates were rising, and then these insider trades that you're mentioning: We saw that the CFO and the CEO both unloaded quite a bit of stock under a 10b5-1 plan—I hope I'm saying that right—to forecast that they were probably going to sell stock at some point. But the timing is so interesting to me. Feel free to jump in here. But we know that the SEC revises insider trading rules so that you would have like a 90-day cooling off period before you can sell any stock that you said you might be selling under a 10b5-1 plan. And their 10b5-1 plans were adopted late January. The expanded rule from the SEC took effect in late February, so there's very interesting timing on when this all happened. 

Josh: I would say that if I'm looking at all the—there's a couple of issues out on the table. One is this insider trading. One is, you know, the changes in market conditions and how quickly things deteriorated, from the interest rate side to the bonds to being able to raise capital—how that all went south. The other is the financials, and we kind of talked about those disclosures, but the one that I think is the most serious, I mean, that insider trading one is pretty ugly, honestly. I'm not sure that—I mean, that's incredibly convenient, or there was probably some information alluding to something, you know. And again, they had that $2 billion unrealized loss coming through. I mean, it's not like that wasn't out there either. So, I mean, I don't know, it just seems it just seems like a big chunk of stock and the timing on that could not have been worse if I'm that CEO, honestly, at this point in time. 

Steve: Well, and to get back to the whole notion of timing, it's also not uncommon for a CEO or an executive to have to unload some stock in that short window that you have between your, you know, earnings release for the year end and then when you go into a blackout period for Q1 where you can't do any trading. You get that stock, and you've got to pay taxes on that. And often, you may have to pay taxes before you've even realize any of the cash unless you were to go ahead and sell it. So again, I mean, I totally agree the timing is super, super convenient, but even that just feels like, man, nothing went right. Ernest, I see you shaking your head here. If you're a chief compliance officer and you're seeing all these things, are you raising red flag after red flag to be like, hey, guys, what is going on here? 

Ernest: Well, ever since this news broke out and—you know, what was it last Friday (March 10, 2023)—more and more information is coming out. They didn't have a chief risk officer for eight months, it was stated. So there's nobody there to raise the red flags, or maybe the folks that would do it are so far deep into the trenches and they don't know how to get that to the proper channels, whether it's a CCO, a chief compliance officer, or a chief risk officer. So it just seems all too convenient. Like Josh said, this kind of perfect storm of everything. And then the other angle I want to take with this guys, and bear with me to see where this goes, how fast that this happened. Yes, it was 48 hours where the Fed just kind of came in, but this has been unraveling over time. I was looking at the facts: 2016 there were $45 billion in assets. By the end of 2020, 200 billion in four years. And it's not coincidental that there's the part of Dodd-Frank, the Dodd-Frank Act, that was rolled back in 2018 and allowed them to take on more riskier investments. And there's a correlation there. So this dates back even before just what happened last week, and so it just boggles my mind. All these things: the fire sale of the shares by the executives, the sale of the portfolio with that $2 billion unrealized loss, and then the whole social media component of it, right? Because I was reading that there were, you know, tech founders that were kind of texting each other and posting on Instagram and Twitter, like, go take your money out. And then you see pictures on the news of individual customers like you and me that potentially have accounts there, and there's a line outside of the door that's two miles long of depositors trying to get their money back. So, I can't think of a time, you know, something this big happening by one company and then what the downstream ripple effects, like Catherine mentioned earlier, will have on the entire industry. 

Steve: But you bring up Dodd-Frank. Ironically, Barney Frank, the Frank of Dodd-Frank, is actually on the board of directors of a different bank that has since been closed down, I believe. He, incidentally, blamed crypto for the whole thing. Maybe that's part of the investments that you're talking about. But, look, I don't want to laugh. It's not funny, but just the catastrophically bad timing and the way that this all came together. 

Catherine: We asked whether the auditors should have caught something. Just to look at it from a different angle, if the auditors had caught something and said we're not sure that SVB can continue as a going concern, wouldn't that have still caused the same problems that we're seeing with the bank run essentially? 

Josh: I think so. This is a human nature problem. Everyone kind of became like more concerned about just getting their own money out, and so as soon as that information was public, they would have spurred it on themselves. Now, the only thing is if the auditors would have caught it, they would have disclosed it. They probably would have disclosed a remediation plan with it, like, hey, this is out there. This is what we're going to do about it. So that it's not a problem. They probably would have addressed that where it's all speculative like right now. I mean, the government basically is going to step in and bail these guys out, which good for the government. I mean, that's probably a good reason we have them. Like what the hell are they for if they're not going to kind of step in and do this stuff for us? So, I think that piece is good. But yeah, if they would have caught it, I think they would have just had a plan that probably would have mitigated just some of that like what Ernest is referring to where all of a sudden everyone just was like, we've got to go get our money out. Because if you didn't have that rush, this is probably—what's interesting is if you didn't have that piece of it, this is probably a non-issue. They would have raised the money. This happens all the time in banking, you know? And so it probably would have just been another day honestly. 

Catherine: I don't know if you're allowed to say out loud, but what kind of pressure is there on auditors to either not issue a going concern? What do you call it? What kind of pressure is there for auditors not to say? 

Josh: Yeah, if you look, they've been their auditors since 1994, so it's been a minute, you know. I think their audit opinion showed that, but so you've got this 30-year standing relationship with them. I mean, there's a lot of pressure there. However, five years ago, I would have said there's been more pressure to not issue an opinion like that. They would have been more nervous about it. Now, given the state of regulation and the pressures they get from the PCAOB under the guidance of the SEC, I don't think the auditors would take on that risk. I think if KPMG knew something, they would have done something about it. Again, when you read their disclosures, they called it out. They nailed it down. They said there was going to be a fundraising event. And they basically said, based on everything we've ever seen, it would be remote that they couldn't raise the capital they needed to to cover anything that they needed to. So now the off side is the bad investments like investing in debt, like the Fed kind of screwed things up a little bit there. Cryptocurrency was a bit of the asset, so you kind of took a double whammy on the valuation side, which happened very quickly. But apart from that, I don't know honestly.

Steve: A going concern, especially for a bank, I mean, that's a kiss of death. That by itself would have caused the bank run, right? I mean, if you see that you may not have sufficient capital to operate as a going concern within the next year, well, yeah, no crap I'm going to get my money. Are you kidding me? That to me becomes such an extreme outcome of this. And if you just really think about the way that the auditor-client relationship works, you know, auditor does their work. They sense some concern. OK, they take it to the client. Hey, you know what? These are some things that we're worried about. Oh, OK. You know what? Yeah, we're aware, but let me take you through our plans. And assuming a relationship of trust that, you know, certainly the client's not lying to the auditors, it—just to me—does not seem farfetched at all that everything was above board, that there were no other issues. And, as Josh said, they disclosed it. So anybody who was reading the report, I mean, it's not just a clean opinion. It's hey, we noticed this thing, but we've got a plan in place. There is a little bit of risk, but this stuff happens all the time. 

Josh: Well, and even if you go out there today and you look at going concern opinions, because they exist and, honestly, they'll ride for a number of years a lot of times. When you actually get into that position where it's like, well, our business is suffering, but we're going to keep going. We're going to let people know what's happening. The only thing is they would have disclosed a plan with the going concern. They would have laid out future steps. Here's what's going to prevent it. We're going to either ask the government—I mean, you know, whatever it would have been—we were going to ask the government to step in. We're going to raise capital. I don't think the auditors, I don't think that they would have been discouraged from issuing a going concern had they known. I don't think that would have been the issue. They would have issued a going concern, and then they would have said, but here's the plan for them to keep going. 

Catherine: From the customer perspective, do companies usually keep their cash in multiple places and not just one bank? 

Ernest: If they were smart, they would have multiple accounts for different purposes. And so I immediately go to that third-party risk management. So if I'm the founder of a tech company or any company and I've got all my assets in one bank, you don't want to have all your eggs in one basket. So I'm hoping there's a diversification of where you're putting that money, but that's the biggest thing to me. I don't think about like the individual person that's going to be impacted by this who's trying to get their money out. I'm more concerned about companies and the employees that are affected by this. I mean, there's such a downstream effect on this. 

Josh: Well, but. Agreed. If we were talking about if we have truly lived in this capitalist world where they made this mistake, they don't have the money. But let's be honest here. The government's just going to step in and fund the whole thing. They're not going to not make people whole about this, right? 

Ernest: Well, that's the hope, right? And I think the Fed has been very clear, not just to SVB but to the entire banking industry that, hey you need access to cash. We've got it. And they're making it very affordable and available to these companies. So, it's not just SVB. There was another bank that failed recently too, and so are these the warning signals that the market is taking a look at? Like oh crap, what's our financial system looking like right now? 

Steve: Well, Josh, it occurs to me you actually mentioned this earlier about the Fed raising interest rates. I mean, it's been so long since we've been in this kind of an environment. I'm not sure companies either have the muscle memory or whatever to be thinking about, hey, wait, holy cow, we've got all these low-yielding investments here. The Fed is just, you know, skyrocketing interest rates. And that's going to have an impact. And I would hope the Fed is thinking about that. 

Josh: To your point, this might be one of many. SVB might just be the first quite honestly. Because the Fed has never raised rates—I mean, well, never is a strong word. They never raised it this way, I would say. They've never tried to counteract inflation with this methodology. So it is a little bit new. I mean, they've raised rates before and it's gotten high. But, I mean, they're raising them fast. And how do you expect these big financial institutions to account for all those variables? I mean, I'm not sure. To your point, there was another bank. I'm not sure where this isn't the beginning of a few of these things. I'm not sure that the Fed isn't like causing part of the problem quite frankly. 

Catherine: We're seeing the government step in to say the depositors' money is going to be guaranteed. They're also saying we're going to make some cash available for loans if banks need it. So hopefully that'll be enough. I don't know if you all have thoughts about whether that'll be enough or not. 

Ernest: It's a short-term fix, but there is a longer-term problem. The fact that the FDIC only insures up to $250K, which for an average person is a lot of money, but again, for people who own these companies, is that enough? So we've got to go back and take a look at what insurance policies are in place, and are they the right amounts? And what kind of reform is going to spawn from this? I don't know. It's just an odd time. We haven't had a financial crisis like this since 2008. So for the past 15 years, have we just kind of been floating in the ether and thinking everything's great, everything's growing, and now all this stuff kind of comes crashing down? 

Josh: Well, I think the difference is we've got a lot of differing monetary policies happening. And you don't know the impact that they have on the economy and the Fed's trying to predict it, but they don't, you know, they can only do so much to do it either.

Steve: Well, and if you're a bank and your inventory—I say that in air quotes—is cash. Low interest rates? I mean, interest rates, cost money, right? So the cost of your inventory is practically free. You would think it'd be a terrific time to be a banker for the last 15 years or whatever, right? Suddenly things get more expensive, just like with inventory. Hey, eventually that's going to cause some kind of a crunch. 

Josh: Yeah, and I just have maybe one final point on my end. We've—and I don't mean to jump back to the topic, but I'm going to do it anyways just in this forum—how come nobody caught it? We're the auditors. The audit, whether it's internal or external audit, no audit system is designed to catch something two weeks after it happens. You would have to be auditing live transactions constantly. And then even then it's debatable like if you would pick it up in a sample or even be able to extrapolate that conclusion out of that sample that something is weird here. This whole notion of we're the watchdogs. When this stuff happens—that audit that they issued, that opinion, it took them nine months to freaking do that audit work, you know? And so you're saying how come after like two weeks these guys didn't catch it? That's not even, like, real, you know? So I don't know. I think there's something to be said about that. If you think you're just going to come in and overregulate this or put watchdogs on it, we're not going to be—like business moves too fast compared to the audit, like the rate of audit, and there's just no way that that's the answer either. So I don't know. That'd be my two cents on it. 

Ernest: I agree with you. I mean, audits by nature are as of a point in time. And they're always backwards looking, right? So, in and of itself, you know, to place blame on any one group, whoever, it could be either internal or external. I just I don't think that's very prudent. 

Steve: As we think about that, though, do you both see this being maybe one other sort of motion forward or impetus of somehow, some way modernizing the way that we currently think about an audit? I mean, you know, I know Ernest outside of course doing podcast. You talk a lot about real-time auditing, using audit analytics, and being a lot smarter about it and the use of technology. Do you think that this is just one more thing that says, hey, we got to think about how we're even handling audit relative to these kinds of risks? Because when things move so fast, whether due to social media or whatever, something's got to catch it. You know, we've got to have some way to identify it, hopefully to prevent this from happening again. 

Ernest: Yeah, I think you're spot on with that, Steve. I mean, the technologies are there. I think what's lacking in the market—and if you think about governance, risk, and compliance in general, they are typically laggards when it comes to technology adoptions. You know, we've been talking data analytics and big data for 15, 20 years now. And a lot of these audit shops or internal audit teams are still to this day trying to figure out how do we deploy such technology because they're so used to doing—to Josh's point—sample testing. And yeah, it's like trying to find a needle in a haystack. Well, if these technologies can just give you a haystack full of needles and then you figure out what to do with it, that would be further along the line. And then you have other things like generative artificial intelligence, or generative AI, like ChatGPT. You've got machine learning and RPA and all these things, and I think there's just a general lack of awareness of what those technologies can do and how it can help them become more effective and efficient and broaden the scope and coverage around risk.

Steve: Well, Josh, maybe we give you the second final word. Do you see external audit processes modernizing in the same way? I mean, it's one thing, as Ernest was talking about, when it's all internal. External audit, of course, is, as you know better than anybody is a very different animal. Do you think that changes?

Josh: There's no way it could speed up. I mean, these processes it takes so much time. It takes so much thought. You have a real people shortage. I mean, you've got the regulators second-guessing everything they do. They're just spinning you in circles. Like there's no way that they could get there any time in the near future, in my opinion. It's just not set up for it, which is a bigger debate. And are we looking at the audit profession the right way honestly? But there's no way that they could they could speed that up to something that would be more meaningful, in my opinion, given the current state of things.

Catherine: I'm sure we could keep talking about this all day, but we're going to get to our closing question of the day. So cash crunches can happen to anyone. I want to hear the circumstances of when you had to move money around on a moment's notice. 

Josh: It's interesting. You always look at a set of financial statements and they are at a point of time. And so most of the time, that period falls around year end or after a peak season. And so financials naturally will look a little bit healthier than they are. But if you were to look at a set of financials of a company that was in one of their trough periods, there's always a pull on cash. There's always a moment where do we have enough cash? And we've had it to the point where it's like, hey, in this low period, if you're paying for a lot of inventory or we're doing something over here, are we going to make payroll this week, guys? There's a lot of forecasting, and that's why we have treasurers out there that basically just watch inflows and outflows and predict it day in and day out. But make no mistake, there's a treasurer everywhere that's identifying a period where things might be a little bit tight at some point in time in the year. 

Ernest: I don't personally have experience. I mean, I'm just an auditor, or former auditor recovering, but I do have friends that are in the startup world. And I've heard stories where in order to make payroll, they were maxing out credit cards and taking loans on the credit. Now, you know, they had to do what they had to do. And I think that's one of the bright spots. It's just kind of human ingenuity and, you know, the fortitude to kind of plow on. I mean, other than scrounging for coins in my couch, grabbing it from my car, or wherever, I don't have a better story for that. 

Catherine: Steve, how about you? 

Steve: Yeah, I got a fairly embarrassing story, as a matter of fact. I don't know how or why, but when I was in college, I had pretty much condensed all available cash I had to me into a—it was a $50 bill. That's how broke I was and how long ago this was. And if I remember correctly, I was driving my car through the drive-thru at a Taco Bell. My brother, for some reason, was in the front seat, and I was sort of like flashing around this $50, sort of being a punk about it. It fell. It slipped through my fingers and went down to where the car window rolls down because the window was down, so all of the money that I had, of course, now just got, you know, lost in this, you know, nether world of whatever. So I literally pulled the inside door panel off just so I could get 50 bucks, pay for my meal at Taco Bell, pay rent and groceries and everything else. So that was a very literal example of a cash crunch where I needed to move a few things around in order to get access to it. 

Catherine: I didn't know a Taco Bell took $50 bills.

Steve: Well, that one did. And I'm glad they did, because otherwise I would've really been toast.

Ernest: You could get a lot for over 50 bucks. 

Steve: I know, especially back then. Catherine, how about you?

Catherine: Oh, a similar story. It was at Costco just yesterday, hoping to get a churro. And you needed a debit card when you go there. I didn't have anything, so I had to rearrange, do some, you know, pulling of coins from the parking meter stash that I have in my car and then come back and get the churro. 

Steve: Oh, man. All for a churro. 

Catherine: They're really good. 

Steve: Yeah. Yeah. 

Ernest: Was it worth it.

Catherine: For sure. 

Steve: Well, Josh, Ernest, a big thanks to both of you for joining us on the podcast. It'll be very interesting to see how this all plays out. 

Catherine: And thank you, dear listener, for surfing along with us. I'm Catherine Tsai. That was Steve Soter, and this has been Off the Books presented by Workiva. Please subscribe. Leave a review. Tell your buddies if you liked the show. If you're watching this on YouTube, leave us a note in the comments, or feel free to drop us a line at OffTheBooks@workiva.com. Surf's up and we'll see you on the next wave.