The US Securities and Exchange Commission's (SEC) top advisor on accounting and auditing has issued a warning to accounting firms working as "crypto auditors" against publishing misleading reports. The SEC has cautioned these firms to carefully consider how their reports are marketed as their work, in some cases, may not meet the definition of auditing.
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SEC warns of misleading crypto audits. Crypto “Audits” May Not Provide Reasonable Assurance To Investors
In a recent statement, Paul Munter, who serves as the SEC's principal advisor on accounting and auditing, noted that certain crypto companies have been promoting their partnerships with accounting firms as auditors. However, he pointed out that their work does not fully align with the definition of auditing. SEC warns of misleading crypto audits.
Munter said:
“Certain crypto asset trading platforms, with others in the crypto industry, have marketed to investors their retention of third parties, sometimes accounting firms, to perform some sort of review of certain parts of their business, often presented as a purported “audit.”
Mr Munter further warned accounting firms not to label their reports as “financial audits,” as they are not as rigorous or comprehensive as true financial statement audits.
“As accounting firms increasingly engage in this sort of non-audit work, their clients’ marketing and terminology risks misleadingly suggesting that these alternative, non-audit arrangements are at parity with, or even more “precise” than, a financial statement audit.”
He continued by saying:
“Such suggestions are false. Non-audit arrangements are neither as rigorous nor as comprehensive as a financial statement audit, and may not provide any reasonable assurance to investors.”
Proof-Of-Reserves Are Inherently Limited, And Customers Should Exercise Caution
The SEC's accounting and audit principal recently mentioned a statement made by the Public Company Accounting Oversight Board (PCAOB) in March. The board expressed that "proof-of-reserves are inherently limited" and advised customers to be cautious when relying on them to determine if there are enough assets to meet their liabilities. Mr. Munter recommends that accounting firms, who conduct reports that are labeled as financial statement audits by crypto firms but do not meet the criteria, should take immediate action.
“The accounting firm should consider making a noisy withdrawal, disassociating itself from the client, including by way of its own public statements, or, if that is not sufficient, informing the Commission.”
Proof Of Reserve Reports Surge Following FTX Collapse
Several crypto firms have released proof-of-reserve reports to assure their customers that they have enough assets to meet customer liabilities after the crash of the crypto exchange FTX and the panic that followed. One of these firms is Crypto.com, which published its proof-of-reserve audit results by Mazars, revealing that it maintains sufficient reserves. WazirX, an Indian crypto exchange, also released its report, showing that 90% of its users' assets are stored in Binance wallets. However, auditing firm Mazars, which was responsible for Binance, Crypto.com, KuCoin, and several other crypto firms' proof of reserve reports, announced that it would pause all its business with crypto clients. The firm found Binance's Bitcoin reserves to be overcollateralized but removed the report from its website.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
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