The Securities and Exchange Commission (SEC) is increasing its scrutiny of auditors’ work for cryptocurrency companies, Acting Chief Accountant Paul Munter told The Wall Street Journal in an interview.
“We’re warning investors to be very wary of some of the claims that are being made by crypto companies,” he said.
Prompted by the collapse of FTX, cryptocurrency exchanges have hired outside auditors to provide a proof-of-reserves report to show that these businesses are solvent and have enough assets to cover their liabilities, the Journal had previously reported.
These types of attestation are meant to reassure investors, but are limited. Most crypto exchanges are privately held and, as such, are not required to file financial statements with the SEC or get them audited. Auditors don’t personally sign the attestations, unlike reviews of a public company’s annual financial statements.
“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.”
The SEC is worried about these attestations, the Journal reported. Recently, Binance, the biggest crypto exchange, issued an audited proof of reserves that had been independently verified by audit firm Mazars, a Binance spokesman said, but Mazars didn’t express an opinion.
Last week, Mazars “paused its activity relating to the provision of proof of reserves reports for entities in the cryptocurrency sector” including Binance, “due to concerns regarding the way these reports are understood by the public,” the Financial Times (FT) reported.
Other auditing firms may follow suit.
“We’re rating the whole industry as high risk,” Jeffrey Weiner, Marcum LLP chairman and chief executive officer, told the Journal. “We’re being careful about which clients we keep, which clients we take on.” BDO is conducting a review of the work it does for crypto companies, a spokesman told the Journal.
Big Four firms are also shying away. A look at 19 publicly traded crypto mining companies by financial fling analysis software maker Bedrock AI found that none is currently audited by Deloitte, Ernst & Young, KPMG or PricewaterhouseCoopers.
These firms are “very reluctant to move into the space, especially at a lower level of service than a full audit, which in my view is the only level appropriate for these types of entities,” Jeffrey Johanns, accounting professor at the University of Texas at Austin, and a former partner at a Big Four firm, told the Journal.