Accounting firms that are functioning as crypto ‘auditors’ were issued a warning by the US Securities and Exchange Commission (SEC).
The securities regulator warned them to be careful about how they market their reports, or else they would be suspended or censured.
The warning
The principal advisor of the SEC on auditing and accounting matters, Paul Munter, issued a statement on Thursday.
He said in the statement that the work that accounting companies do for crypto companies does not fit the definition of auditors, even though they later market their relationship this way.
Referring to the Public Company Account Oversight Board (PCOAB), Munter stated that reports regarding proof of reserves have inherent limitations.
Therefore, it is essential for customers to exercise caution when they look at them for ensuring that the companies have enough assets for meeting their liabilities.
It seems that the SEC is taking action against crypto companies, which claim that ‘proof of reserves’ are the same as audits of financial statements.
The statement
According to Munter, accounting companies are engaging in such non-audit work and the terminology and marketing that their clients are using can be very misleading.
It is because they imply that these non-audit arrangements are the same as a financial statement audit, or even more accurate.
He stated that these implications are false because these arrangements are not as comprehensive or rigorous as financial statement audits, so they cannot offer investors any reasonable assurance.
Munter asserted that an accounting firm should take action if it produces such a report for a crypto company, which then refers to it as a financial audit.
He stated that the accounting company should disassociate itself from the crypto company and make a lot of noise by making public statements or informing the SEC.
Crypto and accounting firms
Mazars Group, the international auditing firm, dropped Crypto.com, KuCoin, and Binance back in December last year.
The company decided to stop offering crypto-related services because of the media scrutiny and also of indicators that its ‘proof of reserves’ reports had not reassured markets.
This happened just a month after the downfall of the FTX crypto exchange after which there had been a lot of concerns about insolvency in the crypto industry.
Another accounting firm called Armanino had allegedly audited the FTX crypto exchange in 2021 but had not noticed the irregularities that had resulted in its collapse.
This possible misstep led to a class-action lawsuit against the accounting firm last year. Since then, the company has not conducted any crypto audits.
This means that companies like CoinShares, Nexo, and Kraken have been left without an independent auditor.
Some of the accounting company’s members decided to leave and formed a crypto-native accounting firm named The Network Firm.
After the downfall of FTX, there had been pressure throughout the industry to move towards financial audits and proof of reserves reports.
But, a study conducted by Bloomberg in May revealed that out of the top 60 companies, only 31 have gotten their proof of reserves attested or undergone a financial audit from an independent firm.