Crypto Audit Isn’t Enough, Says SEC



The US Securities and Exchange Commission is increasingly scrutinizing audits conducted for cryptocurrency companies with concerns over their legality.

These crypto companies are seeking to display their clients’ assets following the collapse of FTX. Many are seeking auditing firms to provide third-party assurance to their clients and potential investors.

However, the SEC cautioned that investors should be skeptical of these proof-of-reserve reports, arguing that they do not provide enough information. The SEC said some of these reports neglected to include all relevant financial information, which the firms claimed violated confidentiality.

According to Acting Chief Accountant, Paul Munter, the SEC is investigating how crypto companies are portraying these auditing reports. “We’re increasing our understanding of what’s going on in the market,” Munter said. “If we find fact patterns that we think are troubling, we will consider a referral to the division of enforcement.”

However, since many companies are located overseas, they are outside the jurisdiction of the federal securities regulator. As a result, the SEC is effectively issuing warnings not only to investors but also to auditing firms about their reputations at risk.

Auditors Leaving Crypto Firms

The potential reputational risk of verifying crypto company books has already become apparent. Following the collapse of FTX, authorities began to question the legitimacy of the firm’s auditors, Prager Metis and Armanino. While both companies are holding on to their work, John Ray, the new CEO of FTX, said the audit statements were not credible.

Binance, the world’s largest cryptocurrency exchange, is struggling to retain auditors following the suspension of operations by Mazars. The global auditing firm independently verified Binance’s proof of stores, but its report contained little financial information. Neglecting to express an opinion on the report, while not actually verifying the numbers, Mazars suspended his work with Binance and withdrew his report from its website.

Now, Binance says that even the Big Four accounting firms are “reluctant” to provide proof of reserve audits. Many believe that the lack of effective internal controls in crypto companies will compromise the integrity of the financial statements. Meanwhile, other such companies are reconsidering taking on crypto customers due to concerns about the risk of lawsuits, reputational damage and regulatory scrutiny.

Insurers Out, Bankruptcy Lawyers In

In addition to accounting firms and auditors, insurers are increasingly questioning their relationships with crypto clients. In light of the above risks, insurers have denied or significantly limited coverage for customers engaged in cryptocurrencies.

But as these financial firms avoid further involvement with crypto companies, another group of professionals is seeing more employment. Due to a string of crypto company bankruptcies over the past year, business is booming for bankruptcy attorneys.

disclaimer

BeInCrypto has reached out to the company or the person involved in the story for an official statement regarding the recent development, but has yet to hear back.



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