Silicon Valley Bank Collapse: Understanding The Impact On Your Firm & Clients

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Blake Oliver: [00:00:25] Hello and welcome to a special episode of The Cloud Accounting Podcast. I'm -

Blake Oliver. [CROSSTALK] And I'm here with David Leary, my co-host. And we've got an amazing panel for you today to talk all about the SVB collapse. What does it mean for accountants? What does it mean for your clients? What does it mean for this week? We're eager to talk with you, Ask your questions in the chat. We've got folks here with us in the webinar. There's people on LinkedIn, there are hundreds of you. So we will do our best to get to all of your questions and help you sort this out. So first I want to start with a very, very quick timeline of events. So if you weren't addicted to your phone and watching what was going on on Twitter and on the news this week, you need to know. But first, a disclaimer. None of this is tax, legal, accounting or investment advice. These are our personal opinions. Consult with your advisors for individual advice. And now let's talk about what happened. Quick timeline of events. The SVB sold 21 billion of securities at a 1.8 billion after tax loss on Wednesday.

Blake Oliver: [00:01:31] They also announced that they were raising fresh capital by selling new shares on Thursday. The stock price plummeted after SVB announced it sold all of the available for sale securities in its portfolio and downgraded their forecast. The CEO said to stay calm, but the VCs were not reassured. They freaked out in their group chats, and Peter Thiel and others started telling their startups to pull the money out. 42 billion in deposits were pulled. That is greater than 25% of their deposits, all in a single day. On Friday, the Trading and SVB shares halted. California regulators put SVB into receivership under the FDIC. Janet Yellen said she was monitoring the situation and payroll and payments in process were frozen on Sunday. Thank God regulators stepped in to guarantee deposits over the 250,000 FDIC insurance limit, which is very important because 7,097% of deposits SVB were over that limit and there will be no bailout for SVB investors. So depositors will be made whole, but no bailout for the investors. And that is the quick timeline of events. Now let's get to the discussion we've got.

Matthew May: [00:02:39] Well, just just you got to add this real quick, though. Oh, yes, Matthew. Monday, we also announced that the timeline for signature bank was 10 billion got got called on Friday. So that on the same press release, the third largest bank collapse was signature bank on Sunday. All this stuff is going to apply to them, too.

Blake Oliver: [00:02:59] Okay. Yes and yes. We had one other bank that was affected by this shutdown in New York, and they're going to be made whole as well. So and that was a crypto bank, right, Matthew?

Matthew May: [00:03:09] Well, they they banked a lot of crypto, but they did a lot of tech and P kind of companies as well.

Blake Oliver: [00:03:15] All right. Well, so you can see we've got Matthew Maye of Acuity on the broadcast today. We also have Shay Schirrmacher. We've got Mike. Mike, how do you actually say your last name? The umlaut gets me.

Mike Moïse: [00:03:26] Yeah, thanks for asking. It's actually think of mowers and mow your lawn and G's and put them together - Moïse.

Blake Oliver: [00:03:32] Moïse. Mike Moïse. We got my co-host, David Leary and Ray Arellano. Welcome, guys.

David Leary: [00:03:38] Hello. All right.

Blake Oliver: [00:03:39] So let's talk first about the immediate impact on APS firms and clients. And David, I know that you have been preparing a list of all the affected APS. Let's talk about that.

David Leary: [00:03:48] Yeah, So I think Thursday night is when it really hit me and I actually almost texted you Blake, and then I was like, I'll just go to bed. There's nothing we can do. We'll see what happens the next morning. And and the reason it hit me is I, I understand that APS are using Silicon Valley Bank lots of apps in the ecosystem. And if I think about the last eight years of my career dealing with all these apps and these companies, every single time somebody pays for dinner, buys a drink at a bar, it's a Silicon Valley banker. It doesn't matter what country they're apps from, they're all doing business with Silicon Valley Bank. And then there's this second layer, which is really more concerning. And I tweeted this out early Friday morning is like, hey, if anybody is seeing missing payments because the AR and AP and I didn't even think about payroll. So Silicon Valley Bank offers rails. So an app can use API calls and move money on the train tracks of Silicon Valley Bank. So you could have a client using an app. And have exposure to Silicon Valley Bank and not even know it, even though they don't bank there. And the show kind of how complicated this is before we show kind of the apps we're tracking, Blake, I put a link to a tweet with a screenshot. So this is the footnotes of the website, bluevine. So Blue Vine is a bank, so you could be at a whole different bank, blue vine, small business bank and their bill pay part of their product stores those funds at Silicon Valley Bank. So it shows how layered and complicated this can get really fast.

Blake Oliver: [00:05:17] So blue that. Yeah, yeah, I see it now. We got it. We got it up on the screen. So you made a list of apps that are affected. Let's talk about which apps, right? Because even though the FDIC announced that depositors are going to be covered, funds that were in process on Thursday, Friday, like, I have doubts as to whether or not that money is actually going to get delivered on time. Right. Because the bank was shut down. New bank opened up. Right. Do they have the same account number, same routing numbers? Like what's going to happen? They say the checks are going to clear, but are they really? So let's let's get into that. Yeah.

David Leary: [00:05:49] So so payroll was the first thing because people are watching their bank accounts for paychecks and they didn't show up So rippling was one of the first companies to really be proactive talking about this and they instantly started moving things to chase JPMorgan Chase rails instead. But so all the a lot of the payroll companies, one of the big patriot apparently they had a way deeper relationship not just their payroll rails their company itself a lot of funds were there and then you start hearing about Millio modern Treasury uses them to move money, sports engines. So like that's a website where maybe not for, you know, small businesses, but any of your kids are in sports and you're paying those those dues, that money, Etsy payments aren't coming through, right? Airbus acknowledged Avalara. So maybe there's a sweep account that's at Silicon Valley Bank because they're using their APIs. Now, what happens to those funds? Do they get paid to the government? So that's kind of where these relationships are. And then, you know, came out and said they had secondary accounts there, right? It wasn't their primary bank. It was a secondary bank, but they still had like $350 million there. So my whole thing is like the ripple effect, and I don't think we've documented it. I only have 40 apps I have some confirmations on. I think it's hundreds. So these apps.

Blake Oliver: [00:06:59] Here up at the top, these are the ones that are like we're the most impacted, right? Obviously, like Patriot was the big one because they only used SVB.

David Leary: [00:07:07] From what you can tell. Yeah. In their documentation. And then there's a bunch if you scroll down that from we've gotten feedback. They have no exposure, which is good. So there's a little lower. There's no exposure.

Blake Oliver: [00:07:18] Adp is good. You know, gusto is good. All these paychecks practice ignition ramp. No, because of the bailout.

David Leary: [00:07:27] I do think there is some. And then I'll shut up after this. I do think we're over a major catastrophe because if companies were banking with them, whatever app it is, So APP was using them as their primary bank and they can't get that money out. They probably only had two weeks, 2 to 4 weeks of payroll left and they would have had to shut down their app, which would have been a much bigger ripple effect across the board. But I imagine the APIs and the rails like those are gone now. So these apps are going to have to come up with new, new, new procedures for that. But yeah, so it's just that ripple effect. And then because of this now I suspect Bill, So payroll was Friday, but I think Monday, Tuesday, Wednesday this week you're going to realize if Bill pay came or not, we had a pending payment. Blake you and I had a pending payment coming through, but I think it was sent on Wednesday, which means it made the ACH clearinghouse by Friday, which then we got it today. But if somebody sent something by Thursday, it's probably not going to show up. If you're expecting money that came through through some of these apps, you might not see it Monday or Tuesday or Wednesday. And it's hard to track because it's a wrap, right? It takes longer to know when it comes.

Blake Oliver: [00:08:32] So basically what I'm hearing is like we we know that payrolls are going to get reprocessed, right? Rippling is going to be able to process payroll. I mean, that's what you guys are hearing, right? Like I imagine Patriot will be okay. Everyone will have to reprocess, but it'll be fine. We're not sure about the AP and the AR component. Like are those payments going to make it? We probably should be advising clients as to the uncertainty of that. Let me go to you first, Matthew. What are you how many acuity clients were affected by this? What are you telling them? What are you advising other accountants to tell their clients?

Matthew May: [00:09:03] Yeah, I mean, we have a vertical in both crypto and tech, so we had just under 100 clients affected by this. So the things we're we're saying, there's three immediate actions. The first action is to set up a secondary bank account in the CEO of Relay has been really helpful for our clients in getting us some help over there. They weren't affected by this and they also are have an additional product for the people with over 250 K and so they can have additional FDIC. So we can talk about that later. That's not really for right now. So number one, get your secondary bank account set up. Number two, stop the inbound. So you have all the inbound apps that we use. Think of any merchant processing account stripe, charge a fee, all of them. Right. Stop where that's going. Make sure that's going to the secondary account and not to one of these accounts that's frozen. We should be-

Akshay Shrimanker: [00:10:00] QuickBooks payments as well.

Matthew May: [00:10:01] Quickbooks payments is a great example of one you should be thinking about. So anything that's depositing in the bank account, make sure you redirect that to the bank account you have access to. And then the the third thing we're recommending immediately and these are all today items because payroll is pulling from lots of people for the March 15th payroll today. Make sure if you if you've moved money that your payment accounts have been changed for rippling gusto. Any of those things rippling has sent comprehensive explanations about what things to do. They have moved to chase. So if you're a rippling customer, they've sent a comprehensive list because they were affected. So to minimize the effect. So those are the top three things Blake we're starting with and we're just trying to triage from there. There's lots of long term things to think about.

Blake Oliver: [00:10:53] Yeah, no good points. What about you guys? What about, you know, Shay? Mike Ray, what are you telling clients?

Akshay Shrimanker: [00:10:59] I mean, from my side, on Thursday and Friday, I think the biggest thing I realized was that our clients don't know their account and routing numbers and we don't also know that. And if we look at if you look at any Silicon Valley bank statement, what you're going to see is all of the account number is masked and you just have the last four numbers, right? So that was like a significant thing is who should be in custody of that information and us as the accountants. Do we necessarily want to keep all that information on our drives? Probably not. But who at the company should be in custody of that? I think just something as basic as that now needs to be completely rethought because in a crisis on Thursday and Friday, when people are trying to send wires at like breakneck speed, you know, you miss a digit, you're going to be sending wires to the wrong place. I mean, that was the biggest thing that I saw. And at that point, segregation of duties just kind of went straight out the window. Right? Because it's like, who's actually making these wire transfers and assistant. There were folks who were at South by Southwest last. So the founder wasn't even in front of a computer. They were like at a conference speaking or in the audience. And uh, yeah, so, so I think there's so many issues that just came up in that crisis that need to be thought through. How if something like that happens again, how are we going to, uh, deal with a crisis like that? I know it's unprecedented and a bit of a black swan event, but it's something that needs to now be thought through.

David Leary: [00:12:33] So I hear you correctly there on that. So I'm a small business owner and I'm kind of lazy. And so every time I need my bank account information, I just log into the website and it's there and it's convenient. It's on the website. But if the website goes away, you're right, I don't have my bank account information, right? Like it's almost like step one, like document and put that somewhere, right? And so, and I worry about anything else because if you don't have that, how are you supposed to make your claim and get your money?

Mike Moïse: [00:12:58] And I was joking about this. So thinking about that is actually important because, you know, you have the last passes out there, but even those can't be trusted with, you know, banking information that you can likely put. So to piggyback off of that, off of what Matt said, there's definitely that blocking and tackling that needs to happen with the account transfers and the setups. The other thing that I definitely wanted our teams thinking through is cyber security or just data in general, right? At these types of moments, there are people that want to take advantage or could take advantage of the chaos. So who you're giving information to, where you're sending that information, where you're storing that, that's incredibly important. And the second thing actually, just in speaking to a lot of legal counsel, and I'm hoping and assuming at least with a lot of our clients that they're in touch with legal counsel is when you're moving money, a lot of these companies that bank with SVB have lines of credit. They had venture debt that they taken out, and those contracts and agreements legally actually didn't allow you to move that money. So before you go ahead and move that money, just definitely check in with legal counsel, understand the ramifications because that debt is still going to be on the books and owed. And a lot of the restrictions may or may not apply. So that's something that you definitely want to think about as you're moving money before you do it.

Rey Arellano : [00:14:12] Yeah, we have roots here in Silicon Valley, so I was affected in multiple ways by this. And I would take one step back because we're talking about companies and clients that use SVB, but there's a layer of top of that, you know, depositors who were talking about. But what if they were an employee? What if they were an investor? What if they were an unsecured credit holder? And what if they were a borrower? And if you're a borrower and a depositor, there's a lot of chatter going on that they're going to offset before they liquidate. So now what does that do to your cash flow downstream? So there's a lot of permutations and angles here that go beyond just if you're a company that's a depositor there, and then there's second tier effects. So what if one of my customers or my clients is there and their cash is tied up and they're going to be late paying my are you know, I'm not just talking about me and my firm. I'm talking about our clients as well. So there's a lot of kind of mapping out and thinking we have to do. The first thing I'm saying is don't panic. I think that the FDIC stepping in tells me in a certain way that the money at SVB is probably some of the most stable money right now. Right. It's going to be available. And so map out the cash sources and uses evaluate your balance sheet- Both- all- all sides. Identify your alternative banks where you're going to start spreading out your risk over the 250 K, start moving the funds, reconfigure your apps and communicate. And oh, by the way, this probably all needs to be done today and tomorrow.

Mike Moïse: [00:15:52] Oh, and just to add to that right, more blocking and tackling. Make sure you have your bank account reconciled as of an appropriate date. Like there's so much money that was going in and out at any given March 10th. Yeah. This is your basic staff accountant type work, right? But you're definitely going to want to make sure you're you're properly reconciling your account.

Matthew May: [00:16:10] Yeah, one one of the main things when you think of the things that we've done today at Acuity is we've sent global notices to all of our employees, our insurance carriers been in contact with us about the fishing. There's a spike currently in fishing and fraud attempts specifically with messaging around SVB and Signature and Silvergate even who are the three primary banks that have been in the news. So one of the things we always tell people, like what I was telling people on Friday was be concerned and don't don't panic. And then we have to be measured as we're going through this. Like people are relying on us to be thoughtful and systematic as we approach these things. So disconnecting the inbound to the and putting that to the right of bank, right, being really thoughtful about which payments are scheduled for today and tomorrow and Wednesday. Right. We've got to be systematic about that. When we get an email right now, we've got to make sure we're validating it's from that from those things. So none of our normal protocols go out of place, right? I don't know what you guys have in your firms, but we have a we try not to take custody of anybody's cash in the event that somebody's giving us custody or forced to one of our CFOs to take custody because they've kind of absolved it, we have a requirement here.

Matthew May: [00:17:29] Like anytime we move over $10,000, you have to do a verbal verification with the person that sent you the email. Those are just normal protocols we have in place that a lot of our clients should have in place when they're doing these transfers. So like, we can't we can't like just react, right? We've got to go back to the basics is what we have in place and make sure we're really thoughtful guys. Like this is the time for the accountants to shine. Hopefully because we're measured, we're responsible and we can really think through some of these things. But like some of the non-intuitive things that people were missing last week were the inbound and outbound that are already connected to these banks from their things. And we're going to have to really think about which apps are like doing that from. Like you might have your credit card like that. You're supposed to make a payment today that's like on an auto pay, right? And it's pulling from an account that's frozen, right? You don't want your credit card to be stopped. Payroll's number one though, today.

Blake Oliver: [00:18:26] Yeah. So so I think those are great tips for the immediate any any any other tips for like what we should be doing today, tomorrow?

Mike Moïse: [00:18:35] Uh, I mean, this is, I think if we take everything we talked about, I love checklists. So if you have your controls in place where, let's say, for example, you know who you're supposed to double check with before a wire goes out the door or whatever the case is, just build a checklist for your team or your client. If you're sort of embedded with the client. I think that's it's incredibly important given all that's going on.

Blake Oliver: [00:18:55] And then save that checklist for the next run. Right? Right.

Akshay Shrimanker: [00:18:59] Yeah. Also, you know, the Silicon Valley Bank website is I mean, the account where you can log into your accounts is back up. So I would definitely recommend signing in there if there's some type of a lock in First Republic Bank signing their download bank statements download bank activity as accountants that many of us who are on the outsource side, we may have read only access into a lot of these platforms. So I think at the bare minimum that's something that we could probably do is just pull the basic information in case there's any sort of future lock outs. When I was looking at the FDIC FAQ as well, I'm guessing unless there's a buyer that's going to come in for these assets, that there's some sort of a time limit that this online banking will be open. So I don't know if that's that's going to be a significant amount of time or short. So I guess just getting into the accounts and pulling as much data as possible today would be probably prudent.

Matthew May: [00:19:58] Yeah. I mean, luckily these aren't these aren't major frauds that cause these this is not for everybody also. So the FDIC FAQs are very helpful. It is explaining to people they have all of these records. Like you don't have to do these things like best practices. Yes. Pull your statements and stuff like that just because you want to know. But they have all the records. They know what's going on. If you have loans, there's also a provision you could offset your cash balances with the loans. This was pre the Sunday ruling. So some of the people were going to be able to offset because a lot of the venture debt that people had, they just took out the debt and put it in their cash account. So they're like, oh, you're going to wipe my cash, Are you going to wipe out my loan? There's Q&A on that. The FDIC has actually done a really good job getting information out. Like you have to like this is way different than oh eight to me because there's a plan in place and they're running a playbook. Um, talk about what you want about everybody. But like this is it's been really helpful source of information for our clients and for us.

Blake Oliver: [00:21:01] Ray I think you had something you wanted to add.

Mike Moïse: [00:21:04] Oh, Matt Just saying. Maybe the first step then is to digest that fact.

Rey Arellano : [00:21:11] Yeah, I would. I would just repeat that. It's a time to be measured. It's a time to be professional about it. It's a time to not go crazy and overreact. It is, as Matt said, it's definitely you want to stick to your internal controls. You don't want this to be an opportunity for further harm and risk to you or your clients. So really stick to that playbook. I do like the, you know, the two factor authentication, if you will, of an email and a voice call or that and the text to different channels. It should be a different number because if someone pirates a phone, etcetera, we all know all the deepfakes, etcetera. So just be aware that this is happening. So run your plays, help your clients stabilize the situation. It's not on fire. But, you know, I was telling people last night, luckily after I made the announcement, everyone's going to be covered. No limits. At least we don't have to sprint today, but we still have to run. You know, we got to jog along at a pretty healthy pace and kind of run, but we don't have to sprint. But we do have a lot of stuff to do.

Blake Oliver: [00:22:20] So let me stick with you, Ray, for a second. Do you think we're out of the woods yet?

Rey Arellano : [00:22:23] Absolutely not. No way.

Blake Oliver: [00:22:26] So. So what risks should we be advising clients on if we're not saying apocalypse averted? Right. You know, what do we say? Well, apocalypse averted for now. What could happen?

Rey Arellano : [00:22:37] Right. So, look, I think proper governance is, again, we're going to have multiple accounts where you're insured that you're not over FDIC insurance. So you got to take your total cash balance divide by 250. Some banks have sweep products where you can get up to a million and still end up with FDIC insurance because of how the sweep function works. So just research that, figure it out and don't allow yourself to have risk above those limits. Okay. Uh, number two is it's a great time to to remind all your people that are involved to bolster the internal controls, to avoid scams. You know, play defense here at the same time. And then it it, I think as practitioners as as cloud accounting professionals, it reminds me, I spoke to several bankers over the weekend at different banks saying, look, I'm going to be sending a list of recommend, you know, of referrals to my clients and say, hey, we need to spread your money out. Here's some people we should be talking to. Let me know who you're interested in. You should have this network in place. And if you don't, this is a message to all everyone in the profession. Develop your network among the various communities, bankers, lawyers, etcetera, you know, investment advisers. So when these situations happen, you have a resource and a pool to go to. I've templated out a very simple four sentence message to clients that were saying, Hey, you have a concentration over the limit. Recent events tell us we shouldn't do that. Let's schedule a call to to get our next steps. And every client has been very responsive and receptive to that.

Blake Oliver: [00:24:15] And you know what kind of blew my mind about this whole crisis was how few people understand that there are already services out there to mitigate this risk by spreading your money out at multiple banks. When I was the bookkeeper at a nonprofit, a small nonprofit years ago, we had this service and it was actually through First Republic Bank, which is one of those banks that everybody was worried about, where if we had money over $250,000, our banker would automatically invest it in CDs at other banks. And the service I learned this weekend is called Intra Phi, and there are tons of banks that participate in this and you just got to sign up for it. You know, maybe there's a fee for it. But, you know, just the fact that so many people had millions of dollars in one bank and didn't think that's a potential risk kind of just shocks me.

David Leary: [00:25:03] Some of them. Blake I think part of their when they took the VC money was kind of in their agreements. You must use this bank, you must keep your funds here. You're not allowed to take the funds and move them other places.

Rey Arellano : [00:25:12] Yeah, that was part of the part of the problem with SVB is it was such an incestuous relationship between the VCs, SVB and the and the start up client that there was money being lent back and forth in all directions and deposit accounts, those relationships. And they kept it in that circle. And while that game plan was running for the last 35 plus years, it was great for everybody. Until you realize that there's this concentration risk and you get a run on the bank and then you're screwed.

Akshay Shrimanker: [00:25:39] Yeah. Svb also has sweep accounts as well, but I think a lot of folks had left money in checking accounts or money market accounts and and the way that their advisors were sort of advising how to allocate the funds is also an issue. So something that yeah definitely for the future we need to.

Mike Moïse: [00:26:02] That one thing that I've found and it's going to definitely be something that people think about moving forward is a lot of clients were being advised by SVB. People themselves, right? So there probably was an independence. And it's not just an SVB thing. A lot of, you know, there's other banks and institutions that issue venture debt. When companies raise around, for example, those clauses are par for the course. So, I mean, one thing we probably can't obviously definitely can't answer here is what do those clauses look like for that type of instrument moving forward?

Blake Oliver: [00:26:31] Yeah, it seems like unwise. I think everybody's going to be reconsidering the risk of of bank runs. But I guess, you know, we forgot because when was the last big bank run? It's been it's been over a decade. Right. So yeah, we just got we got complacent.

Akshay Shrimanker: [00:26:47] I think the big difference here is that this bank run was done, you know, from people's like it's interesting how these shocks happen and people are doing like they're responding to them from home. Right? It's not like they're running to the bank and actually pulling the money out. It's like we're now doing all I think they're calling this like the smart. Phone bank run. Right. So, I mean, the way that this is happening now and I guess we're going to have to get prepared for more shocks like this to the system. It's like every couple of years, accountants are having to be on the front lines of this or that crisis. And this is like the new this, I guess, is getting us battle tested to to just deal with this every month. This is like this.

Blake Oliver: [00:27:32] Is like the meme stocks for banks, right, where you had a bunch of people in chat rooms pumping up a rumor and having real world consequences. Right. And this was really when you boil it down. Tell me if you guys agree with this. It was a bunch of VCs in a group chat. Some dumb VCs didn't understand what was happening at the bank and decided to run or they were really smart and they said, everybody's going to freak out. I'm going to get my money out first. And they all chatted about it. And that's what set this off, right? If it wasn't for Slack, you know, maybe this never would have happened.

Mike Moïse: [00:28:04] So I don't know. I don't know how it started off. But I will say, I think someone brought up the prisoner's dilemma, right? That everybody that I spoke to basically said, hey, this is unwise. A lot of VCs in my space and biotech didn't even want to move their money. But think no one had a choice. At one point when everyone realized everyone else was doing that.

Akshay Shrimanker: [00:28:23] But it reminded me of like the start of the pandemic, right? Like when people were logging into the PPP applications. Like as soon as the portals were released, it's like we're kind of getting into this mode now where we're responding to panic and we're all rushing to to do something and we're getting more and more impacted by fear, uncertainty, doubt, right? Fud, I mean, that's that's what's running through through us now.

David Leary: [00:28:50] I think I saw a tweet. It was like, SVP is the victim of the attention economy. Yeah. Like it's just too much attention. And they're a victim of their own attention because they wanted all the attention. Right. And they're the victim of it. But I want to rewind about risk, just to clarify. And I think some of the payroll apps are on the chat, so it'd be great if they could chime in. Rippling made a comment that all the customers, every client of rippling was insured up to 250,000. And so just before the before the the bailout happened on Sunday. Right. So I just have a I want to understand that better because like everybody, all of us have worked with payroll companies. Right. And they kind of do that sweep of your funds out of your bank account. Are they establishing individual bank accounts for just your company at whatever bank they're using to sweep these funds in and out of? Or are they all grouped together? And I never got a clarification from rippling on that through social media. There was a Twitter thread. So I'm just wondering, do you guys have any idea on how that works with payroll companies? Are your funds segregated out?

Rey Arellano : [00:29:53] I would imagine. Look, those are fiduciary funds, right? They the point that that income is earned and you're processing payroll, the money no longer belongs to the company. That's why the government gets so pissed off when when, you know, starving startups with cash flow problems don't forward the withheld payroll tax to the government, you get in personal liability for doing that. So everybody takes payroll super seriously, more so than anything else and for rightful, rightful reasons as well. So I would I would expect and I don't know this for a fact, but I would be shocked if it were not the case that for payroll accounts, because of the fiduciary trust relationship, you know, trust account relationship, that those have to be individually insured. I'd be shocked if it were otherwise.

Matthew May: [00:30:46] Maybe we'll get some of the payroll companies to chime in on that and how that technically works. But I assume it's similar to some kind of escrow account guys that has a different set of FDIC parameters or insurance parameters just based on how they set it up. These are I mean, ADP is not going to have FDIC mean I mean ADP, gusto, like rippling. All these guys are have negotiated this with banks to protect people I assume.

Blake Oliver: [00:31:12] So this this brings up a really good point about how we protect our firms and thus our clients is when we do our due diligence on apps, are we now going to have to ask the question, what are your payment rails? Do you have multiple banking relationships? I would not personally want to work with a payroll company that only has one bank at this point. Right. That makes no sense. And oh, come.

Matthew May: [00:31:35] On, Blake. Let's let's have a reasonable standard here. Like, come on, like, let's not overreact here.

Mike Moïse: [00:31:42] You define payment rails. Blake For anybody in the audience. Well, a lot of people think a lot of people don't know what that is. Yeah.

Blake Oliver: [00:31:48] Yeah, right. So they're you're processing ACH payments and you have to do it through a bank. And so if you only have one bank that you have a relationship with to process payments on behalf of your customers and that bank stops working for whatever reason, it could be that there's a run on the bank. But it also could be that there's simply a technology failure that's going to disrupt all the payments for all your customers, whether that's payroll or that's accounts payable. It's it's the ACH network goes through banks. Right. I think let me know, David, if you think there's a better way to describe that. But that's how I understand it. Yeah.

David Leary: [00:32:20] So it's train tracks, right? And you're just adding train cars on these train tracks. So if the train tracks are gone and you had money in one of those train cars, I don't know where it's at. Right. If it never made it to the finish.

Matthew May: [00:32:31] You have to remember that we're talking about a risk that's only for amounts over $250,000, because none of these none of the people that I've seen is using a non FDIC insured bank for rails, guys. So, I mean, let's let's be a little bit measured with some of these things. I don't know. Yeah.

Akshay Shrimanker: [00:32:48] Because we need to trust the systems essentially, right? I mean, the FDIC is there so we don't even have to think about these types of problems. If we're going to have to start factoring it in, then we got bigger problems. Well, no, I disagree.

Rey Arellano : [00:33:02] I think, Blake, that you're right on that point, that I think that in order to advise clients properly, it's good to know this on the back end you it's it's a foreseeable issue why would you not as a professional in this space track that so yes I would want to know what the rails are and I would want to be sure that every client had multiple accounts, bank accounts that could bypass one set of rails if they needed to. Very easily. My clients who had multiple bank accounts open at the same time, and there are several of them for a variety of reasons, not going to name names. It it was super easy to just move money from here to there internally and and go. Now, if your money is stuck in one bank, at least you have some in another, right? You don't over concentrate at any of them as well. So it's important to know this stuff. And I think, yeah, the world's changed. We got to know it now, we got to track it and bring.

David Leary: [00:33:58] This smaller scale, right? And Blake brought this up on Twitter. A lot of our clients are, you know, the clients of listeners of this podcast attending this webinar are small businesses and they are living week to week. So if a payment, yeah, sure it's insured, you're going to get your $5,000 payment that was spent on these rails, but maybe it's going to take three weeks, right? They kind of need that $5,000. They kind of need it, right, to pay their employees or to pay their rent. Right. So this is like it doesn't like the companies having backup rails where they can reroute money is going to be important. Apps are going to have to change the way they build their own internal stacks and what technology they build on and who they partner with. It can't be exclusives anymore.

Akshay Shrimanker: [00:34:36] Yeah, it's a good comment here by Lisa basically just says exactly that like how they're using multiple relationships now. So I think to your point. Yeah that's you know now when we start asking those questions like who's the bank behind the payment rails, they're going to say, well, it's this list of ten banks, you know.

Mike Moïse: [00:34:57] That should be A. That should probably be a standard disclosure, right? Somewhere on a landing page somewhere.

Matthew May: [00:35:01] I mean, I mean, this is a standard part of risk management, right? Like you're talking about counterparty risk. Like we talk about this in crypto all the time when we're trying to get people to be like, just sane, right? You're like, okay, when you are doing these things, you walk your clients through counterparty risk, right? So in this case, like if you're your bank was, you know, FDIC insurance, like if you are exceeding those thresholds and not using one of these products, you're exposed to counterparty risk. And talk about what counterparty risk is. Guys, for the apps. Yes, sure, you can know which one their rails are. And if you want to do a bunch of diligence and know they have a secondary rails, that's fine. But like all this at the end of the day is just counterparty risk.

Blake Oliver: [00:35:46] So now that the FDIC has stepped in and guaranteed all deposits unlimited, is there really an FDIC limit anymore? I mean, they've set a precedent now. I think everybody's just going to assume that their money's safe if it's deposited at a bank. Yeah.

Rey Arellano : [00:36:00] Yeah. You can't do that. And it's interesting. Kenji just KURAMOTO just made that comment as well. Similarly, you know. No, you can't. I mean, did it happen in this case? I think that there was the fear which is actually happening, You know, keep CNBC on in the background. The bank stocks are getting crushed today and there's a lot of fear in the out there. Had the FDIC not stepped up. 6:15 p.m.. Eastern on a Sunday night to increase the 250 limit to be you know, we'll cover everything. Could you imagine how the market opening would have been today? It just so they had to do this to avoid this risk. What they're going to be doing in the meantime is, oh, my God, what about something like Dodd-Frank and was it Mnuchin and company who reduced those limits tenfold? It's like, you know, there were these regulate. We've lived through this once. We're now we're again and we had the controls in place and they got lifted. It's like, I'm sorry, everybody hates regulations, but sometimes there's a reason for it.

Matthew May: [00:37:06] Yeah, I think I think that's where we kind of shift to at some point later in the week, getting to our clients about the long term Treasury planning for people over 250 K So that's going to have to be a thing. It's going to have every every one of those conversations is going to have two components. Do you have a secondary bank account set up just with money in it to have it have it there just in case? And do you have a Treasury policy for when your balances go over 250 K Like those are the two things you're going to have to make sure that they're going to include.

Mike Moïse: [00:37:38] Matt to to really just piggy back off what you just said. This is an observation that I had way early this morning. I'm noticing because of the sophistication that now is accessible to smaller companies, companies that are earlier stage right with that and I tweeted about this with that comes the sophisticated risk that you typically would have in the past seen at larger companies. So one of the more practical things that I know and I remember from, you know, a lot of my public companies is a concept or a report called the SOC one Report. And for any of you that obviously studied for some sort of exam or have come across this A SOC one report has two types. And really that that takes like an SVB, for example, and it requires them to get audited and to share with you a user of their platform, their controls and their systems that they have in place. These things already exist. But for like public companies. So like Sarbanes-Oxley requires these types of things, right? And now what I'm seeing is people like us now have a responsibility for like the earlier stage companies, like the series A, B and even before to actually assess that same whether it's counterparty risk or concentration risk and ask those same questions.

Mike Moïse: [00:38:49] So I'll give you one example is A. There's a company out there that wanted to create software for clinical trial, finances, finances. So I talked to them and was really trying to understand what they wanted to do because I didn't want to bring them and put them in front of my clients. Well, they didn't even have a SOC one report, and my message to them was, Hey, if you want to play in the big leagues and you want people to trust you, you got to get that report and be able to show it. And number number two on that is that has to be reported or audited by a an institution that you trust. So there's a lot of shops in my space, a lot of shops that are popping up that are giving a stamp of approval for these reports. And they're they're not legit. They're automating. Yeah, they're just they're just churning reports out to get these companies to get in front of companies that will pay that will build their trust.

Akshay Shrimanker: [00:39:36] So that's like the big I think the bigger point that you're bringing up here and because I saw some tweets about, oh, you know, CFOs need to be blamed for this, and it's like, hold on, there are companies raising upwards of ten, 20, 30, $50 million and there is no finance function at these startups. There is no CFO. They are dependent on outsourced outsource accountants such as us, and then they're using fractional executives to handle the rest, Right? There's no internal finance function. I mean, even at Ft. I mean, there was the whole they're using QuickBooks and there wasn't really any oversight. So I think the longer these companies stay private and and they keep raising money, there isn't enough internal motivation from the board to put finance people in place to take this responsibility. And like, you know, most of us around here, we're all the outsourced folks trying to step in and help where we can. But like ultimately the companies need to be. Now, I think that that that's what something that comes out of this is if you raise a series a round, you should really be thinking about installing like a full. Time finance hire at that point.

Blake Oliver: [00:40:48] So I want to emphasize this because I think this is like very important sweep accounts. Right? A lot of people don't know what they are. Can we just reiterate how they work and how do you get access to that? Why you should use them.

Rey Arellano : [00:41:03] It's a bank product. So your banker, any any good banker, reputable banker that if you discuss with them about the need for a sweep account, it basically takes all of your money in a in a in your demand deposits checking account and overnight it the balance goes to zero and it's invested in other markets or Europe, Asia, etcetera. And then in the morning when you come back and you're back in business and the US markets open up, the US banks are open, your money comes back in and you can earn a percentage on your money overnight. And it does diversify the FDIC insurance you can get. I think you can get these sweep products up to like 1 million or 1,000,002, something like that.

Akshay Shrimanker: [00:41:51] You can even get them larger if like if the if the one one startup we work with, they had their money distributed between 100 and 20 different banks and each bank had a 250 K and you see and you only need one banking relationship really to to do that.

Rey Arellano : [00:42:07] Yeah. Yeah, I think. I think you can get a single bank up to 1.2 million ish. And if you use sweep accounts and end up with all of that being FDIC insured, the way it's structured, if they structure it properly. But that's what sweep accounts are. Blake For the audience.

Blake Oliver: [00:42:24] Okay. Yeah, no, thank you for that. I think this is really important because, I mean, obviously a lot of people in Silicon Valley have no idea of this concept. I am kind of shocked that the VCs didn't advise their founders on this. Like, I understand why founders wouldn't know about this because they're just trying to run a business. They aren't most of the time. They're not finance people, they're not accounting people. But like, where were the VCs in all of this? Not advising their portfolio companies on Treasury risk management? Like you would think that they could at least do a do a little bit of coaching on this. But like their.

Mike Moïse: [00:42:59] Soul, I think from what I'm seeing, VCs are, well, let's take a step back, right? What happened earlier last year was a lot of people started focusing more on cash flow because they realized they weren't raising funds. And I think at that point, that sort of forced VCs to, you know, double click a little bit more. But even still, I'm seeing a lot of VCs are still far removed and a lot of VCs honestly haven't operated a company, so they're not going to really understand some of the nuts and bolts of setting up a sweep account to sweep, you know, anything above 250 K into something that's earning you some return and a little bit safer. So there's a disconnect there for sure.

Rey Arellano : [00:43:36] And it's under under under appreciation of risk. You know, if bank runs never happen or don't ever happen, everybody everybody knows about well, I shouldn't say everybody, but, you know, most people in this profession are aware of the $250,000 FDIC limit. Heck, read the cash paragraph of any audit gap audit report. First thing it says is, Hey, the client has more than 250 K above the FDIC limit. There's a risk there. It's in the audit footnotes everybody kind of knows about.

Blake Oliver: [00:44:03] And everybody reads the audit footnotes, right? They don't. Lisa Lisa says with the sweep account really help in this circumstance, as you described, cash being held overnight and coming back during business hours. Matthew, you replied that it depends on the product, the way it worked, the way it worked when I had one at the company I worked for, is that the the excess cash was invested in short term CDs that had a maturity date of a month, two months, three months, six months, whatever. And we had a rolling set of CDs that were, you know, coming mature. And so we always had enough cash to operate, but not enough to be at risk. I'm sure it could work in a variety of ways. So Mike said, Let's not forget the VCs themselves. We're parking large amounts with SVB and how they handled capital calls.

Matthew May: [00:44:47] Yeah, this is a this is an interesting one because most of the the VCs and private equity firms use SVB and Signature Bank for their lines of credits for short term capital calls. So in the in the in the intermediate term, if they cannot get lines of credit this week guys you can expect if you're in a venture fund or a private equity fund to be getting a capital call as an investor, which is just fascinating.

Rey Arellano : [00:45:12] Well, this is part of that echo that I was talking about in the in the risks. We don't know yet what's going to what what's really going to hit from all of this stuff. And we're not going to know for several days and weeks and even a couple months. Um, there's going to be there's some stuff on sv's balance sheet that's incredibly valuable. They've got warrants in all these startups, biotech companies. You know, I, you know, all kinds of stuff that's pretty valuable. These companies are really going to hit it. They just don't have time to wait for this to come to fruition. Two, three, five years down the road, someone's going to pick up that asset for theoretically lower than what it should be valued at because of the fire sale. You know, so there's just all kinds of stuff. There's VCs that were borrowing from SVB that what are they going to do now? They're going to have their own liquidity crisis. Some of their portfolio companies are going to go out. There's going to be an extinction of some otherwise very viable and valuable tech companies that under other circumstances would have been very successful in three years. But they're not going to make it through this event because their upstream funders are going to now run out, have a liquidity problem and can't fund them in today. So there's just all kinds of stuff going on here that we're not going to know in the moment. Which brings us back to what do we do today, this week, the next couple of days? And we got to stay in touch on this going forward. Yeah.

David Leary: [00:46:43] I kind of think about the mike you brought up, how the public companies have to do this for compliance and they have to disclose here's our banking partners, here's how we're you know, this is all in those SOC reports, right? Maybe there's an opportunity for the Intuit's and Zero's of the world. Like, for example, Intuit has the QuickBooks App Store. Apps on that store cannot be listed if they don't go through a huge security review. Right. So they're testing them from a security perspective. But maybe all these apps and these companies, QuickBooks, Xero, etcetera, before you list these apps in your store, you've got to do a little diligence on their financial backing because to some extent, too, if you put an app in the App store and take out a bank collapse out of this, they just don't run their business very well, right, financially. And then the app goes away. Now you've got to move your clients off of there. So maybe there's an opportunity for an Intuit and Xero and arguably Sage and Sage as well, right? When you put these apps on your app store to vet out the redundancies they have under the covers. When it comes to money movement.

Akshay Shrimanker: [00:47:38] There's I mean.

Matthew May: [00:47:39] There's definitely an opportunity for Xero and QuickBooks to give accountants in our dashboards better insights to which banks our clients are using in a reporting way. I can guarantee that after doing that across 700 clients this week and evaluating not just apps but also bank accounts like this takes bank feeds to a whole new level. Guys like this is this problem. So this is like trying this is like a serious this is just a crazy crisis of data this week.

Akshay Shrimanker: [00:48:10] Also, do we need I mean, do we need to step back and also say that is this just part of the risk that we take in giving these startups the freedom to innovate and build? And, you know, this collapse and what's happened is just part of that aspect of things, because if we start tightening up things too much, is it just going to disincentivize innovation? You know, are we kind of putting too tight of a grip on it? So I think there's a balance there that needs to be struck.

Matthew May: [00:48:43] Well, I mean, let's let's let's just say I mean, collapse throwing collapses are the two banks right now, just to be fair, like the problem, the financial problem that the two banks had logistically, this was a relatively inexpensive like fix from the FDIC insurance coffers, like we're talking about maybe single digit billions, maybe maybe $10 billion total to cover the holes if you liquidated their portfolios today. So like when we say collapse, let's be measured with that as well, because like the actual problem here when we dig into it was the available for sale securities. Literally, these guys were buying five year treasuries at 2%. Right. Or mortgage bonds at 2% that were five year maturities. Right. Those are those things when they come to maturity, are full value guys. They had a short term liquidity crisis. So just before we say collapse and like that kind of stuff, let's let's go back to the actual problem and not scare the crap out of everybody.

Blake Oliver: [00:49:45] All right, guys, we got ten minutes left. So I think it was Shay had an idea or Mike. Mike said, let's do a summary of takeaways. And I think that's a great idea. So I'm going to go around. We'll go around one more time. You all get, you know, one, two minutes. Tell us, what are your key takeaways from this? What's your advice to your fellow accountants? And we'll wrap things up that way. Shay Let's go around. We'll go around clockwise from you. Unless you want to pass and come back.

Akshay Shrimanker: [00:50:13] Yeah. I mean, I think I think like just to summarize what everyone's been saying, you know, diversifying the risk, opening up multiple bank accounts, at least of bank accounts that have insured cash sweep account functions. I see that already. Brex and others are sort of competing on that and trying to say how much they're insured over. So I think that's like an easy first step, second step. Um, you know the payment rails. Yeah. Look into maybe especially for payment rails that you may be highly dependent on or at or look into which who's sort of behind those behind the curtain using those. And then I think finally, um, you know, having a process in place for knowing what your bank account numbers and routing numbers and what your actual like raw information is so that in the event of an emergency, there is some pathway that you could take or you have that information readily available, um, obviously in a secure place. But that I think those would be my sort of key takeaways.

Blake Oliver: [00:51:19] Matthew.

Matthew May: [00:51:21] Yeah. I mean, as farm owners in particular, we have a responsibility right now to be really thoughtful and systematic and measured in our response and supporting our folks because our all of our employees are facing this issue with our with this. So I'll just tell you what I've done this weekend. We've reminded our employees about the the crimes happening, the phishing, the risks. We've reminded them of those facts. We've reminded them of the things we do normally in situations we've prioritized the short term things that we have to do for people affected. Create a bank account, stop the inbound cash coming in from the variety of things, check on the outbound payroll and bill pay and things happening just in this next three days. Then we've separated out into the long term and now the next thing I have to do is help construct for all these conversations people are going to have about Treasury management, how we prioritize with that client. But that's going to begin with always having a secondary bank account and identifying these FDIC products that extend over 250 K coverage for our clients. That's my summary.

Rey Arellano : [00:52:39] Uh, Blake, are you on mute?

Blake Oliver: [00:52:42] Blake. Thank you. Of course. I'm on mute. Uh, over to you, Mike. We have a list of impacted apps that we know of at bank collapse. Appinfo. You can check that out if you missed the beginning of this stream.

Mike Moïse: [00:52:54] Yeah, I will just echo what the prior two folks said. And I will say from a practical standpoint, you should be reconciling your bank activity. As of the last time SVB shut down on you just to understand what actually left the bank, what came in. And number two, think I love that the phrase being measured and tempered in your approach. That also means selecting different bank partners, right? So you want to diversify, but make sure you just go through and understand based on where your company is going, what kind of bank partner you need, what presence they have, what kind of payments, whether it's foreign currency payments you maybe need to make. There's a whole side of this, right, with SVB in the UK that we haven't thought about. Some of my clients have entities in the UK that use SVB, so just think about that, right? Don't just quickly move to a bank partner out of haste. You still have to think through the next few weeks and make that decision. So that's that's what I want people to take away.

Blake Oliver: [00:53:52] Awesome.

David Leary: [00:53:52] David, I think just slow down. Don't do anything for the next until maybe Wednesday when it comes to signing up for new apps, sending out payments, things like that, because we're not even one full business days out from this yet, right? We're like, this happened Friday. It was a weekend and now we're, what, halfway through the first business day. So like, let's let's see what happens after three business days where everything should be a little bit more calmer and then start making real decisions, moving clients around and stuff.

Blake Oliver: [00:54:23] And. Ray, you get to take us out here.

Rey Arellano : [00:54:26] Woohoo. All right. I completely agree with everyone said, you know, don't panic. Now is the time as professionals to do analysis, to make decisions or to help clients make decisions and to take action. And you got to do it in that order. Right? Ready, aim, Fire! Know it doesn't work out so well when it's ready. Fire, aim. So let's just stick to the playbook, not panic. Assure our clients, communicate with them and have a game plan and go for it. I think the FDIC stepping in to insure this without limit is super helpful. I think that. It's a big wake up call of a lot of stuff that we need to change. And as a final point, this is what a great opportunity. I hate to say it this way, but what a great opportunity for us as professionals to remind our clients of the value that we can bring to them in times like this. So. You know, let's wrap this up in a couple minutes and get back to work.

Blake Oliver: [00:55:32] That's right. We have one last question from John. Come in. I would be curious if any state taxing agencies will have a forgiveness time period for tax payments. Right. Maybe you were making that payment at the last moment and CPE shut down, Right. You missed the payment deadline.

Rey Arellano : [00:55:47] Most of most of them do. Most of them do. They have if you have extenuating circumstances, you can get penalty abatement. I wouldn't worry about that. That's the least of your problems at the moment.

Blake Oliver: [00:55:59] Cindy says, thank you so much for holding this special panel and sharing your knowledge. It is super helpful. Kenji said. Great webinar, awesome group of panelists. Except for Matthew. He was just okay. Well, Lopez says, Thanks everyone. Miki says, Thank you for this webinar, Sasha. Thank you. Oh, it was great. Thank you. Thank you so much, guys. Oh, dude, you.

Matthew May: [00:56:17] Got to put this on earmark so they get.

Blake Oliver: [00:56:19] Cpe too. Oh, yeah. Actually, that's my final question for you is do you need CPE and would you like to earn CPE for having watched this webinar? If enough people type yes into the chat, I'll put it up on earmark as a free CPE course and you can go get the CPE by taking the the quiz on the earmark CPE app. And I'm seeing so many yeses. So go to earmark cpcomm If you have not and download the app, sign up and you can get free CPE credit for attending today. Thanks guys. I hope you have a great week and I really appreciate all your advice.

Creators and Guests

David Leary
David Leary
President and Founder, Sombrero Apps Company
Akshay Shrimanker, CPA
Akshay Shrimanker, CPA
CEO/Founder of Shay CPA P.C. CPA, Quickbooks ProAdvisor, Deep expertise in Early Stage Tech Company Accounting, Tax Compliance, and R&D Tax Credits.
Mike Moïse
Mike Moïse
Servant • Haitian • Finance advisory to tech + biopharma CFOs • #SVBWarRoom/#SVBDebrief 🎙 @weleadwithvalue | Own Views.
Reynaldo E. Arellano CPA PFS CGMA
Reynaldo E. Arellano CPA PFS CGMA
Reynaldo Arellano is a Certified Public Accountant (CPA) with professional designations as a Personal Financial Specialist (PFS) and Certified Global Management Accounant (CGMA). In addition to providing traditional CPA services such as bookkeeping, accounting, and taxes (planning, compliance, and representation) his Firm also offers tactical CFO services and strategic business advisory services. Mr. Arellano started in the financial profession as a Big 8 auditor, then an accounting software consultant, then a Controller eventually becoming a CFO, and held NASD and life insurance licenses (presently inactive). Mr. Arellano has consistently proven to have the highest levels of integrity, intelligence and innovation. He has held numerous managerial (C-suite) and leadership (board of directors) positions within corporations and non-profit organizations.
Silicon Valley Bank Collapse: Understanding The Impact On Your Firm & Clients
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