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Shareholder activism is rising, even outside the US. Given recent market-shaking failures, more such assertiveness is welcome.
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Silicon Valley Bank and other recently collapsed banks all received clean bills of health from outside auditors raising the question of whether accounting standards themselves need to be reformed.
Experts say it’s only a matter of time before US company accounting rules are ripped up, after Silicon Valley Bank (SVB) and Signature Bank went bust less than two weeks after Big Five auditor KPMG gave both lenders a clean bill of health.
US public companies typically follow generally accepted accounting principles (GAAP), the established financial accounting and reporting standards. But GAAP is under fire for letting companies obscure the actual value on their books.
SVB did not have to recognize losses on its assets if it didn’t sell them. The California bank classified its government-sponsored mortgage bonds as “held to maturity,” which let it exclude unrealized losses on those holdings from its earnings, equity and regulatory capital. It was also sitting on a mountain of long-term government bonds that fell in value as interest rates rose sharply.
But as market whispers fueled further withdrawals, the bank had to find the funds to return depositors’ money. Eventually, SVB sold $21 billion of securities on March 8, incurring a $1.8 billion loss. Nine days later, it filed for bankruptcy.
Since then, S&P Global Market Intelligence discovered that SVB had the most uninsured deposits among US banks, more than $50 billion, with Signature Bank in fourth place. But S&P had to comb through regulatory call report filings because GAAP filings exclude certain items, like intercompany deposits, that would paint a more complete picture.
Corporations can expect to see tighter reporting standards, starting with how investments are valued, says Steve Doire, strategic platform and client advisor at Clearwater Analytics. Doire says, “We think the ‘held to maturity’ categorization and how much of a portfolio can be included will be overhauled. At a minimum, we expect more disclosures; and we might even see new financial reports in GAAP statements that specifically calculate asset-liability matching.”
It remains unclear whether the International Financial Reporting Standard (IFRS)—the global accounting standard adopted by around 145 countries—will also be scrutinized. Companies don’t need to recognize unrealized losses for “held to maturity” assets in their financial statements under IFRS, he adds, but the latest iteration does give greater transparency on market fluctuations.
This article appeared in issue April 2023
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