SEC Tightening Up on Crypto Work of Auditors

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SEC Tightening Up on Crypto Work of Auditors

By CoinUnited.io Research Team

23 Dec 2022

2 min read

A senior official at the Securities and Exchange Commission has stated that the SEC is increasing its oversight of audit firms' work for cryptocurrency companies out of worry that investors may be obtaining a false feeling of security from the reports. Paul Munter, the SEC's acting top accountant, said in an interview, "We're telling investors to be very skeptical of some of the promises that are being made by crypto firms." As a result of the increased scrutiny, at least one audit firm has dropped their crypto customers, often just after completing their audits of the firms' assets and liabilities. Mr. Munter claims that the watchdog on Wall Street is scrutinizing how crypto businesses present their audit company findings. By doing so, the SEC is alerting investors and conveying a message of warning to audit companies that would rather avoid getting in trouble with their regulator. Mr. Munter has stated, "We are enhancing our grasp of what is going on in the marketplace." Proof-of-reserves reports, which try to demonstrate that the crypto firm has adequate assets to safeguard customer cash, are of special concern to the regulator. In the wake of the demise of the crypto exchange FTX, several businesses have scrambled to prepare such reports, relying on the reputations of audit companies to reassure consumers. The largest crypto exchange, Binance, presented what its CEO dubbed a "audited proof of reserves" earlier this month. A representative for Binance stated that audit company Mazars has independently confirmed the reserve proof. Very little financial data was included in the study, and Mazars did not offer an opinion, thus it cannot be taken as an endorsement of the figures presented. According to the SEC's Mr. Munter, "investors should not place too much reliance on the mere fact that a company states it has a proof of reserves from an audit firm." An investor "cannot determine if the firm has adequate assets to meet its liabilities" based on such a report alone, he said. Someone close to the business indicated that getting a full-fledged audit done after FTX crashed would have taken too long, especially considering the crisis of trust in the sector. Binance stated in a statement, "Ultimately, our users want to know that their assets are secure and that our business is financially sound." Insiders in the business say that other audit firms are having second thoughts about working with crypto companies due to the danger of lawsuits, reputational harm, and increased regulatory scrutiny. To to Marcum LLP's CEO and chairman, "We're evaluating the whole business as high risk," Jeffrey Weiner. A spokeswoman for the audit company BDO stated last week that the business is currently reviewing the work it performs for crypto firms, including deciding which customers to take on or keep. High-profile investigations of FTX's external auditors after the crypto exchange declared bankruptcy highlighted the dangers of approving potentially inaccurate financial statements. And Armanino LLP, audited parts of the FTX empire, giving multibillion-dollar business's investors peace of mind. Last month, FTX's new CEO, John J. Ray, claimed that the audited financial statements could not be trusted. Although neither Prager Metis nor Armanino responded to our requests for comment, we can confirm that we stand by the quality of our past work for FTX. Errors in the financial statements are more likely to occur because to the widespread absence of efficient internal controls at crypto firms, which contributed to the FTX explosion. According to experts in the field, this is one of the main reasons why the largest audit firms have stayed away. These companies may be pickier about the customers they work with because of their size. Bedrock AI, a company that develops software to evaluate financial records, revealed that none of the 19 publicly listed crypto mining businesses were being audited by Deloitte, Ernst & Young, KPMG, or PricewaterhouseCoopers. According to accounting expert and former partner of a Big Four company Jeffrey Johanns of the University of Texas at Austin, "the Big Four firms have...rightly judged the risks [of auditing crypto businesses] are exceedingly high." Binance "reached out to various significant businesses, including the Big Four," which "are now hesitant to execute a [proof of reserves] for a private crypto startup," the company explained. All four major accounting firms (Deloitte, EY, KPMG, and PwC) said they had no comment.

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