Binance Auditor Mazars stops all crypto work

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Mazars Group, the accounting firm used by crypto giant Binance Holdings Ltd. and other major industry players to secure their assets held in reserve, halted all work for crypto clients, dealing a blow to an industry seeking to boost confidence. following the collapse of FTX.

The French company has suspended the work of cryptocurrency companies due to indications that the markets have not been reassured by the “proof of reserves” reports it has published so far, according to an e company email seen by Bloomberg News. The company was also concerned about media scrutiny, the email said.

“Mazars has indicated that it will temporarily suspend work with all of its crypto clients globally,” a Binance spokesperson said in a statement to Bloomberg News on Friday. “Unfortunately, this means that we will not be able to work with Mazars at this time.” A Mazars spokesperson said the company would release a statement in due course, declining to comment further.

The move is a setback for an industry trying to bolster its credibility with investors following the collapse of crypto exchange FTX, which has been accused of misusing client funds. Listeners have faced similar reactions over the past few weeks, given that FTX itself had hired such services before its collapse, which apparently missed any warning signs. Cryptocurrencies fell after the report, with Bitcoin down 2.7% in early exchanges in Europe. BNB, the native Binance Smart Chain token, fell 4.5%.

Mazars, headquartered in Paris, has been at the forefront of the crypto industry’s rush to perform proof-of-reserves reporting for Binance and other major exchanges, including Crypto.com and Kucoin. . A Crypto.com spokesperson said it would “continue to engage with reputable auditing firms in 2023,” while Kucoin did not immediately respond to a request for comment. A website hosting Mazars reports for crypto clients is currently inactive.

Incomplete picture

Proof of reserves reports have come under scrutiny because they are not comparable to a full audit, in that they only show a company’s assets, not its liabilities, and instead serve snapshots in time that indicate that information provided by customers is extensively verified.

These revelations failed to calm investors, with many opting to pull their tokens from exchanges for fear of further implosions. In the past two weeks, a net amount of $554 million in stablecoins and more than $2 billion in Bitcoin and Ether have been withdrawn from centralized exchanges, according to data from CryptoQuant, although this has largely stabilized compared to to the massive pullbacks seen when FTX crashed in early November.

“It’s unclear how far credit contagion could go, and proof of reserves is not the same as proof of solvency,” said Simon Taylor, head of strategy and content at crypto start-up Sardine. “The problem with FTX was that even though it had reserves, those reserves were massively overvalued relative to their risk in a bank run scenario.”

Binance’s spokesperson said the exchange is exploring how it can provide additional transparency on its holdings in the coming months.

The cryptocurrency industry has long suffered from a lack of established auditing standards, the consequences of which were laid bare in the recent breakup of FTX. The exchange’s co-founder and former CEO, Sam Bankman-Fried, was arrested this week in the Bahamas and faces civil and criminal charges in the United States for wire fraud, among other allegations.

John J. Ray, the new CEO of FTX, told U.S. lawmakers on Tuesday that the defunct exchange had used QuickBooks accounting software to try to track its finances, a system he said was totally unsuitable for a company of its kind. cut.

Read: FTX’s collapse puts auditors in the crosshairs of customers and regulators

FTX had previously retained the audit services of Armanino LLP and Prager Metis CPAs LLC. Ray said FTX has yet to review Armanino’s recent audit of the company’s books, adding, “We need to go through the books and records and look at the audits themselves and see how good they were. complete to see if the audit would have picked out everything we see. We will certainly review the related party information contained in these audits, if there are any footnotes or exceptions.

Afraid of Crypto?

Many crypto companies have argued that they struggle to engage auditors at the top of the food chain for a closer look at their books, in part because of the industry’s tarnished image as a conduit. money laundering and other fraudulent behavior. Several companies have pledged to release comprehensive audits in a timely manner, including Binance.

“Many auditing firms are afraid to work with crypto firms,” Binance CEO Changpeng “CZ” Zhao said in an interview on CNBC Thursday. When asked why Binance didn’t hire a Big Four auditor – a nickname that refers to the biggest accounting firms PwC, Deloitte, EY and KPMG – Zhao added that these companies “don’t even know how. audit crypto exchanges”.

All four companies declined or did not respond to interview requests from Bloomberg News.

Critics have pointed out that while it can be difficult, it is not impossible for cryptocurrency companies to get full audits. Coinbase, the publicly traded US exchange, works with Deloitte for its annual audited statements.

“Over the past few years, we’ve seen more and more auditors develop their practice to address the unique challenges that crypto businesses face,” said Maya Zehavi, a cryptocurrency angel investor. “It’s a shame that obscured trading standards that have become the norm for offshore exchanges will ruin legitimate crypto companies’ access to get a professional audit.”

Others lamented a historical lack of expertise among high-level auditors on how to analyze blockchain transactions and crypto-assets. Jean-Marie Mognetti, CEO of crypto asset management firm CoinShares, described several difficulties in getting a 2017 audit of his books by Deloitte on line.

“It’s always been difficult for them to catch up because the people they have internally don’t really have the skills,” Mognetti said in an interview. The process required significant training from CoinShares to teach Deloitte auditors how to properly audit a crypto firm’s books, he said, with the report then passed on to numerous overseas partners for the sake of the company’s reputation.

The following year, the Deloitte team supporting CoinShares as a client was renewed with new employees, meaning CoinShares would have to start training again, Mognetti said. CoinShares is now working with Grant Thornton for its annual audit. A Deloitte spokesperson declined to comment on Mognetti’s statement.

Insufficient

Ultimately, a consensus remains that proof-of-reserves reports are insufficient even as a springboard for crypto companies eager to show off their financial health.

“If, for example, different parties have claims on those assets, that wouldn’t necessarily result in a proof of reserves report, and likewise, that wouldn’t take into account the internal control environment of those companies,” said Esther Mallowah, head of technology policy at ICAEW, a global professional body for chartered accountants. “It’s a start, and it’s better than nothing, but I don’t think they provide the full picture that investors need.”

A report released by industry group UK Finance on Thursday included suggestions that, as a first step, crypto firms should be required to meet local accounting and auditing standards set out in the so-called Client Asset Rules, which were strengthened after the 2008 financial crisis. “This would provide a framework for customer asset identification, segregation and safeguarding, reconciliation, registration and legal title,” the group said.

— With the help of Anna Irrera, Sidhartha Shukla and Philip Lagerkranser.

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