How biased or problematic were Silicon Valley Bank’s (SVB) accounting reports, and do they herald the start of a new accounting scandal? CPA Shlomi Shub, head of the accounting program and vice dean of the Arison School of Business Administration at Reichman University, addressed the issue as part of a discussion that took place on Monday at the fair value forum on securitization.
“It cannot be ignored that the rapid fall of SVB raises questions about its financial statements that were published only two weeks earlier,” said the CPA again. According to him, the financial statements published by SVB were published very recently in a “completely smooth manner and without a going concern comment or any attention another of the investors”.
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A perusal of the financial statements concerning the bank’s significant investment in mortgage-backed securities (MBS), which led to liquidity difficulties and ultimately ignited the panic of its customers, reveals how distorted the accounting picture was. The fair value of the mortgage-backed bonds at the end of last year was only $76.2 billion, he points out again. But those bonds that the bank purchased, “were presented at their reduced cost of only $91.3 billion.” That is, there was a gap of about $16 billion, Between what was presented in the financial statements, and the significantly lower value of these bonds. “Just getting proportions is almost all of the bank’s capital, which was 16.3 billion dollars,” he emphasized again.
According to him, “Investment in these long-term debt instruments was classified as ‘held until maturity’. Therefore, it was measured according to reduced cost and not according to fair value (that is, according to the price of the bond in the market, H.S.). The accounting classification of an investment to maturity in securities that are debt instruments in financial entities that operate at high levels of leverage is, by definition, an extremely sensitive thing, especially in periods of rising interest rates that lead to a decrease in the fair value of these investments.”
He stated that from an accounting point of view, this classification, according to him, must be examined at each balance sheet date. This is to make sure “that there is an ability – and not just an intention – to hold those securities until their redemption date without the need to pay off obligations”. According to Shub, “The trigger for the bank’s collapse is indeed a liquidity problem, but it has a direct connection to the MCA gap (average life of the bond) – the short MCA of the bank’s liabilities in relation to its assets against the background of the high level of built-in leverage.”
According to Shub, “In retrospect, of course, the accounting classification in this case was not correct, but this of course raises questions about the classification in real time, including the continuation of the classification in the most recently published financial statements. Bottom line, the bank’s balance sheet did not present the true picture and I assume that this is an issue that will still be carefully examined In light of the exact circumstances that prevailed, and one should of course always be careful of the wisdom of hindsight, especially when there is a ‘run on the bank.’ The bank, which is a bit of a poverty certificate for our profession.”