The US Securities and Exchange Commission (SEC) is increasing its scrutiny of the work that audit companies perform for crypto firms as it can mislead investors with inaccurate reports.
Paul Munter, the SEC’s acting chief accountant, stated “We’re warning investors to be very wary of some of the claims that are being made by crypto companies.”
According to Munter, the SEC is paying particular attention to how cryptocurrency companies are representing the findings of their audits. Since many of these firms are privately held or have offshore locations, they are unlikely to fall under the regulator’s purview.
The SEC is especially concerned about “proof-of-reserves reports,” which are meant to demonstrate that the cryptocurrency company has enough assets to cover clients’ payments.
In recent weeks, crypto exchanges like Binance, Crypto.com, KuCoin, etc have hurried to generate proof-of-reserves (PoR) reports in an effort to reassure clients alarmed by the failure of FTX.
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Munter added “We are increasing our understanding of what’s going on in the marketplace. If we find fact patterns that we think are troublesome, we will consider a referral to the division of enforcement.”
Munter added “Investors should not place too much confidence in the mere fact a company says it’s got a proof of reserves from an audit firm. Having such a report ‘is not enough information for an investor to assess whether the company has sufficient assets to cover its liabilities.’”
SEC reports that some proof of reserves reports omit even providing the specific figures. The SEC is essentially warning audit firms while also notifying investors.
Recently, Mazars paused its proof-of-reserves work with Binance, KuCoin, and Crypto.com. Mazars stated they paused it due to concerns regarding the way these reports are understood by the public.
A Binance spokesperson stated they have reached out to multiple large firms, including the Big Four, who are currently unwilling to conduct a PoR for a private crypto company.
The likelihood of financial statement mistakes is increased by the widespread absence of efficient internal controls at crypto firms, which was a contributing factor in the FTX implosion.
According to insiders, this is one reason why the largest audit companies like Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers have mostly avoided the audit of these firms.
Concerned by the possibility of legal action by the SEC and other regulators, harm to their reputation, and increased regulatory scrutiny, other audit firms are now reevaluating their work for cryptocurrency companies.
