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The failure of Silicon Valley Bank (SVB) triggered a global financial tsunami, stunning multiple industries and institutions and shaking the confidence of both businesses and consumers.

 

SVB's meltdown caused not only business upheaval but also sparked a financial contagion among businesses and consumers about the stability of their banks. The SVB debacle also kindled worldwide discussions among accounting firms about their role in ensuring their clients' financial security.

 

A key theme emerged: accountants must serve more than just a transactional role and act as true business partners. The new normal of business requires accountants to take a deeper and more organic approach, becoming a part of the fabric of the client's business and understanding its entire ecosystem.

 

A crucial role is helping clients build an effective risk management program. SVB’s risk management was allegedly not properly calibrated for its business model, among other problems.

 

Being part of the fabric of the client's business means the accounting firm is knowledgeable about their client's business relationships — vendors, partners, significant customers — and applies sound risk management techniques in assessing and implementing preventative controls. The firm identifies risk factors affecting the client’s success, including operations, financial and administrative policies, and technical infrastructure. The firm also prepares the client to take mitigating actions should risks occur.

 

For Kristy McGregor, Founder & Chairman of The Corporate Finance Network, the meaning behind SMB’s failure for accountants is clear: “…there needs to be an element of disaster recovery planning.” According to McGregor, accountants should be asking as standard procedure:

  • “What could go wrong for clients that’s out of their control?”
  • “How can they fix it?

For accountants, thinking out of the box and asking the right questions might be among the most important skills in the new normal of business. It’s much more than just being aware of the risks that you’re currently addressing. Today, accountants need to be adept at forward thinking:

  • Under what conditions would l suggest fundamental changes to my client’s business?
  • What if the company’s top talent left?
  • What if my client lost some of its biggest customers?
  • What if my client’s largest suppliers suddenly went out of business?
  • What needs to happen if my client is to stay competitive, continue growing, and successfully handle changes and setbacks?

According to McGregor, accountants should aim to understand their client's processes and facilities, and then ensure the business understands their wider credit risks and can spot any weaknesses in the long term. It has been suggested that accounting firms serve as their client's treasury department or offer comprehensive, high-level risk management services.

 

The SVB failure has also brought to light the need for diversification. In the current 2023 economic landscape — with ongoing uncertainty and volatility in various markets — diversifying investments, clients, and relationships is essential in reducing potential losses and securing a sustainable financial future.

 

A diversification strategy must also address customer concentration. Understanding the impact that one, two, or three of the largest customers could have on your client's business is crucial. The concentration of customers belonging to one industry is also a potential source of risk that can upend a business overnight. One of the factors that may have led to the SVB collapse was that a large concentration of its customers belonged to one industry: technology.

 

Risk management, diversification, and customer concentration can ultimately affect a client's cash flow. Innovative payment solutions such as Plooto optimize cash flow visibility. This enables accountants to easily view, track, and manage their clients' cash flow.

 

In a recent interview, Reynaldo E. Arellano, CPA, responded: What can we learn from the SVB failure regarding risk management and internal controls, and what role should accountants play in advising their clients?

 

“The SVB failure forced many organizations to wake up abruptly to various risks. First, exceeding insurance limits in general, and FDIC insurance limits in particular. A quick, easy, efficient fix is to use a sweep product from the bank - some sweep accounts have up to $250 million FDIC insurance (which is 1,000 times higher than the traditional consumer-level protection of $250 thousand). Second, any single point of failure in a system is a big risk and should be fixed with a known alternative. These failure points should be evaluated in terms of people - processes - tools/apps. Banks are tools/apps. This means having at least two separate banks with accounts that are funded with at least 30 days of cash burn. Switch the accounting tech stack between these accounts regularly so you know how to do so in a crisis. Third, internal controls are foundational. In times of uncertainty or crisis, the scammers surface. In such times, one should harden defenses, not bring them down - do not sacrifice safety for speed, efficiency, or convenience. Accountants should be the calm, measured, professional voice guiding their organizations, clients, and constituents."

 

The Silicon Valley Bank debacle is a stark reminder that even the largest and most successful institutions are not immune to insolvency. This is why businesses need robust risk management, disaster recovery, and diversification plans in place in the new normal of business.

 

By integrating themselves into the fabric of their clients' businesses and understanding their ecosystems, accountants are uniquely positioned to offer comprehensive, high-level services that manage and mitigate risk. More than ever, accountants can play a crucial role in helping businesses weather the uncertainties and unknowns of the 21st century.

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