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SEC Warns Accounting Firms from Misleading Content on Crypto

Posted on July 30, 2023

The Securities and Exchange Commission cautioned accounting organizations working as crypto ‘auditors’ against misleading marketing by claiming they could be suspended or censured.

The agency cautioned companies working as crypto ‘auditors’ to consider the marketing strategies of their reports. Failure to do so will result in suspension.

SEC’s Advisor Questions Accounting Firms Engaged in Audit Crypto Firms

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A Thursday statement by the agency’s principal advisor on accounting and auditing matters, Paul Munter, revealed that crypto firms had marketed their relationship with accounting companies as auditors. This has happened despite their work not fully fulfilling this task description. 

Paul publicly directs his attention to the Public Company Account Oversight Board (PCAOB), claiming that reports concerning proof of service are intrinsically restricted. Besides, clients need to be alert when using them to deduce they are adequate assets to meet client liabilities. 

SEC Executive Challenges Proof of Reserve Reports Authenticity as Financial Statement Audits

The SEC seems to be abolishing crypto firms that claim that ‘proof of reserve’ reports are financial statement audits. Via a statement, Paul Munter divulged that amid accounting companies gradually engaging in this kind of non-audit work, the customer’s language and marketing risks deceptively recommend that these optional, non-audit plans are equivalent to, or more ‘exact,’ than a financial statement. 

These recommendations are false since non-audit plans are not as all-inclusive or strict as a financial statement audit. Besides, they might fail to guarantee any rational assurance to investors. 

Munter says that if an accounting company makes this kind of report but establishes the crypto firm referring to it as a financial audit, action should be taken. He wrote that the accounting company needs to make a noisy withdrawal and separate from the client, which may include using public statements. If possible, the Commission should be informed. 

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Accounting Companies Engagement in Crypto Audits

In December 2022, Mazars Group, a global auditing company, dropped KuCoin, Binance, and Crypto.com. The organization ceased crypto-associated services because of signs that markets are yet to be reassured by the published ‘proof of service’ reports.

Besides, Bloomberg reveals there are concerns regarding fierce probes by the media. This came just a month following the collapse of FTX, a situation that evoked concerns about bankruptcy in the crypto industry.

Statement on Reserve Audit Causes Confusion Among Accounting Firms

None responded Despite contacting crypto exchanges, including Nexo, Crypto.com, Kraken, Nexo, ByBit, and Binance US. Various accounting companies failed to comment, including Ernst & Young, KPMG, and Mazars. PricewaterhouseCoopers were noncommittal to speak about the Securities and Exchange Commission’s guidance. 

Armanino, an accounting company, supposedly failed to identify wrongdoings that resulted in the collapse of FTX Group. This likely mistake led to a class-action lawsuit provided late last year. 

Since then, Armanino has ceased providing crypto audits, leaving different clients, including Nexo, Kraken, and CoinShares, without an autonomous auditor. In turn, members of the company left, with The Network Firm, a crypto-native accounting organization, being the first.

Post-FTX Collapse Triggers Mixed Utilization of Proof of Reserves Audits

FTX’s collapse evoked the need for an industry-vast move towards financial audits and proof of services. Nevertheless, a study by Bloomberg established that in May 2023, only 31 of the major 60 crypto organizations had undertaken a comprehensive financial audit or proof of service confirmation from an independent auditor. 

Major firms, for instance, Bitfinex and Binance, explained that top firms’ unwillingness was the reason behind the lack of audits. Just two months afterward, the Securities and Exchange Commission has cautioned accounting companies offering auditing services.

SEC Commissioner Hester Pierce termed Munter’s statement an unwarranted attack on good-faith initiatives to enhance transparency in the crypto industry. 

Instead, Pierce urged crypto accountants to exercise professionalism to ascertain the acceptable status in proof-of-service audits. She restated that accounting firms are custodians of checks to the conduct of crypto firms’ management, hence the need to encourage their engagement to foster transparency.


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