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Crypto Auditors Come Under SEC Scrutiny

2 mins
Updated by Ryan James
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In Brief

  • The SEC is warning investors that audits performed for crypto companies could lack sufficient information.
  • Many auditors have already started distancing themselves from crypto companies, due to the reputational risks.
  • Yet, as insurers also back away, failing crypto companies have been a boon for bankruptcy lawyers.
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The US Securities and Exchange Commission is increasingly scrutinizing audits performed for cryptocurrency companies, with concerns over their legitimacy.

These crypto companies have been seeking to demonstrate they retain their customers’ assets following the collapse of FTX. Many have been seeking out auditing firms to provide third-party assurances to their customers and prospective investors.

However, the SEC warned that investors should be skeptical of these proof-of-reserve reports, arguing they do not provide sufficient information. Some of these reports neglect to include all the relevant financial information, the SEC said, with firms claiming it violated confidentiality.

According to acting chief accountant, Paul Munter, the SEC is scrutinizing how crypto companies are portraying these auditing reports. “We are increasing our understanding of what’s going on in the marketplace,” Munter said. “If we find fact patterns that we think are troublesome, we will consider a referral to the division of enforcement.”

However, as many of the companies are based abroad, they fall outside the jurisdiction of the federal securities regulator. Consequently, the SEC is effectively issuing a warning, not only to investors but also to auditing firms about risking their reputations.

Auditors Dropping Crypto Firms

The potential reputational risk of affirming crypto company books has already become clear. Following the collapse of FTX, authorities started questioning the legitimacy of the firm’s auditors, Prager Metis and Armanino. Although both firms stand by their work, FTX’s new CEO John Ray said the auditing statements were not reliable.

Binance, the world’s largest cryptocurrency exchange, has been struggling to retain auditors, following the suspension of work by Mazars. The global auditing firm had independently verified Binance’s proof of reserves, but its report contained little financial information. Neglecting to express an opinion in the report, in effect not vouching for the numbers, Mazars suspended its work with Binance and withdrew its report from its website.

Now, Binance said that even the Big Four accounting firms are “unwilling” to carry out proof of reserves audits. Many believe that the lack of effective internal controls at crypto companies would compromise the fidelity of financial statements. Meanwhile, other such firms have been reconsidering taking on crypto clients, due to concerns over the risk of lawsuits, reputational damage and heightened regulatory scrutiny.

Insurers Out, Bankruptcy Lawyers in

In addition to accounting firms and auditors, insurers have increasingly come to question their relationships with crypto clients. In light of the aforementioned risks, insurers have denied or significantly limited coverage to clients involved with cryptocurrencies. 

But as these financial firms are avoiding further association with crypto companies, another set of professionals is seeing greater employment. Due to the sequence of crypto company bankruptcies over the past year, the business has been booming for bankruptcy lawyers.

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Nicholas Pongratz
Nick is a data scientist who teaches economics and communication in Budapest, Hungary, where he received a BA in Political Science and Economics and an MSc in Business Analytics from CEU. He has been writing about cryptocurrency and blockchain technology since 2018, and is intrigued by its potential economic and political usage.