SEC Warns Against Misleading Crypto Audits

Table of Contents

• Crypto “Audits” May Not Provide Reasonable Assurance to Investors
• Proof-of-Reserves Are Inherently Limited, and Customers Should Exercise Caution
• Proof of Reserve Reports Surge Following FTX Collapse

The SEC’s principal advisor on accounting and auditing issued a statement this week warning accounting firms working as crypto “auditors” against publishing misleading reports.

The US SEC warned firms acting as crypto “auditors” to carefully consider how their reports are marketed, claiming their work, in some instances, does not constitute the definition of auditing.

Crypto “Audits” May Not Provide Reasonable Assurance to Investors

Paul Munter, the SEC’s principal advisor on accounting and auditing, this week claimed in a statement that crypto companies have marketed their associations with accounting firms as auditors but said their work does not strictly comply with the definition of “auditing.”

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 referenced a public statement the Public Company Account Oversight Board (PCAOB) made in March. The board stated “proof-of-reserves are inherently limited” and “customers should exercise extreme caution when relying on them to conclude that there are sufficient assets to meet customer liabilities.”

Mr Munter advised accounting firms that carry out reports that do not constitute financial statement audits but are labelled as such by a crypto firm to take immediate action. He suggests:

“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

Following the crash of the crypto exchange FTX and the panic that ensued, several crypto firms published proof-of-reserve reports to assure customers that it has sufficient assets to meet customer liabilities.

Crypto.com published its proof-of-reserve audit results by Mazars, revealing it maintains sufficient reserves. Indian crypto exchange WazirX followed suit and released its report, showing that 90% of its users’ assets are stored in Binance wallets.

Auditing firm Mazars who was responsible for Binance, Crypto.com, KuCoin and several other crypto firms’ proof of reserve reports, announced 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.