Crypto Audits Are Not Enough, Says SEC

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The U.S. Securities and Exchange Commission is increasingly scrutinizing audits done for cryptocurrency companies, with concerns about their legitimacy.

These crypto companies sought to demonstrate that they were holding onto their clients’ assets after the collapse of FTX. Many have sought out auditing firms to provide third-party assurances to their clients and potential investors.

However, the SEC has warned that investors should be skeptical of such proof of reserve reports, arguing that they do not provide enough information. Some of those reports fail to include all relevant financial information, the SEC said, with the companies claiming they breached confidentiality.

According to Acting Chief Accountant Paul Munter, the SEC is reviewing how crypto companies present these audit reports. We are increasing our understanding of what is happening in the market, Munter said. If we find patterns of facts that we find troublesome, we will consider a referral to the Enforcement Division.

However, since many companies are based overseas, they fall outside the jurisdiction of the federal securities regulator. Therefore, the SEC effectively issues a warning, not only to investors, but also to audit firms against the risk to their reputation.

Auditors Ditch Crypto Firms

The potential reputational risk of asserting the books of crypto companies has already become clear. Following the collapse of FTX, authorities began to question the legitimacy of auditing firms Prager Metis and Armanino. Although both companies are maintaining their work, new FTX CEO John Ray said the audit statements were unreliable.

Binance, the world’s largest cryptocurrency exchange, is struggling to retain listeners, following the suspension of Mazars’ work. The global auditing firm had independently verified proof of Binances’ reserves, but its report contained little financial information. Neglecting to express an opinion in the report, in fact not answering the numbers, Mazars suspended its work with Binance and removed its report from its website.

Now, Binance has said that even the big four accounting firms are unwilling to perform proof of reserve audits. Many believe that the lack of effective internal controls in crypto companies would compromise the fidelity of financial statements. Meanwhile, other such companies have reconsidered supporting crypto clients, due to concerns about the risk of lawsuits, reputational damage, and increased 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 aforementioned risks, insurers have denied or significantly limited coverage for clients involved in cryptocurrencies.

But as these financial companies avoid further association with crypto companies, another group of professionals sees more employment. Due to the string of crypto firm bankruptcies over the past year, business has skyrocketed for bankruptcy attorneys.

Disclaimer

BeInCrypto has reached out to a company or individual involved in the story for an official statement on recent developments, but has yet to receive a response.

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