The collapse of FTX and increasing incidents of fraud are forcing auditors to make harder choices concerning crypto companies.
While the exchange’s collapse has sent shockwaves throughout the crypto industry, it has also sent auditing firms into a frenzy. The perilous state of FTX’s finances as revealed by its bankruptcy has called the work of its auditors into question. Consequently, auditors have been re-evaluating the work they’ve done for crypto companies and their relationship with them.
For many, this means raising the status of their crypto-related clients to “high risk,” while others have dropped them altogether. According to one firm, high risk clients require much more thorough examinations that are also broader in scope.
Auditors must painstakingly assess “systems, controls, the existence of assets, segregation of funds and… [apply] extra scrutiny of related-party transactions.” These additional resources and time accumulate rapidly, significantly raising the overall cost for crypto companies.
FTX Auditors in the Spotlight
As other auditors reckon with the more intensive requirements, those who worked for FTX have come under particular scrutiny. U.S. auditing firms Armanino and Prager Metis have been singled out for the unqualified audit opinions they provided FTX. The former reportedly audited financial statements of FTX’s US exchange business, while the latter did so for its international operations.
Both firms said in statements they stand by their work, but said it had ceased after last year’s audit. However, given FTX’s financial disarray, others question the extent to which these firms actually performed their roles. According to industry standards, auditors must understand a company’s internal controls in order to perform a comprehensive audit.
Yet, many auditors admit struggling with applying consistent rules to an industry innovating faster than new standards are being set. The American Institute of Certified Public Accountants, which sets these standards, has only prepared a handful of chapters for the guide regarding crypto auditing practices.
Crypto Fraud Increasing
Meanwhile, increasing instances of cryptocurrency fraud have also augmented the need for greater transparency within the industry. According to U.K. police, victims reported 10,030 cases between Oct. 2021 and Sept. 2022, a rise of 16%. While the amount lost to fraud generally rose 8% last year, instances related to cryptocurrency jumped 32% to £226 million.
Since the value of cryptocurrencies fell from their peak a year ago, law firm Pinsent Masons reported a growing number of “rug pull” scams. In these cases, crypto project developers will abscond with users’ funds after soliciting significant enough adoption.
There are also “pump-and-dump” scams, in which issuers artificially raise their coin’s value and sell them just before it plummets. Finally, in an era of social media influencers many also fall victim to fake celebrity endorsements.
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