Nervous auditors turn up the heat on crypto clients

Cryptocurrency companies that need their financial statements audited will likely have to pay more for it, and they have Sam Bankman-Fried to thank.

The Bankman-Fried’s Collapse crypto empireand the light he shed on the auditors who signed his books, prompted smaller auditing firms to re-examine their work for infant industry firms.

Several U.S. companies told the Financial Times that they had elevated some or all of their crypto-related clients to “high risk” status, triggering a more thorough audit that will take longer and result in higher bills. Some customers could end up being completely abandoned.

The review comes just weeks before the end of the fiscal year in the United States, where auditors are struggling to apply accounting rules for digital assets that are still only half-formed and regulators keep a close eye on slippages.

“Your antennae should be up at this point,” said Jeffrey Weiner, managing director of Marcum, whose auditing clients include bitcoin miners and digital asset investment groups. The company has designated crypto clients at all levels as high risk following the collapse of FTX and the fallout in cryptocurrency markets.

“When a customer is high risk, you dramatically expand the scope of the audit, which translates to more resources and more time being needed,” Weiner said. Additional work will be required to verify “systems, controls, existence of assets, segregation of funds and of course given FTX there will be additional review of related party transactions”.

FTX Bankruptcy Filings describes a chaotic operation where the crypto exchange was deeply intertwined with Bankman-Fried’s personal business activities, and billions of dollars worth of customer money is missing. John Ray III, the newly appointed chief executive insolvency expert, said he had never seen “such a complete failure of corporate controls and such a complete absence of reliable financial information”.

The filings raised the question of how Prager Metis — an American company with just $139 million in annual revenue — was able to issue an unqualified audit opinion for the 2021 financial statements of FTX’s sprawling international operations. Industry standards require auditors to understand a private company’s internal controls and design an audit accordingly, although they are not required to attest that the controls are strong.

Armanino, a California-based company with annual revenue of $458 million, issued a similar unqualified opinion for the financial statements of FTX’s U.S. exchange business.

Both firms released statements confirming their work for FTX, which both said did not continue beyond last year’s audit.

Given the breadth of companies exposed to FTX and the collapse of digital asset markets, “we are checking with our clients and we have had some instances where we have had to adjust risk ratings,” a partner said. another company that audits crypto businesses. “We are approaching the end of the year, so if we want to continue and complete the audit, we must ask ourselves if we have all the procedures that we need, or new resources that we must bring to bear.

The partner added that smaller auditing firms are likely to become harder to accept crypto clients. “We don’t work for people who are likely to fail. When a company goes bankrupt, there’s a lot of work involved: you’re going to be subpoenaed, filed, people are going to want to look at your work papers to see if you’ve missed anything. It’s implied.

Two weeks before FTX collapsed, Big Four audit firm EY parted ways with Core Scientific, a Texas bitcoin miner who warned it could run out of money by the end of this year . EY said it found insufficient record keeping and poor internal controls, according to a regulatory filing. Core Scientific said it would instead use Marcum as an auditor.

The Big Four – PwC, Deloitte and KPMG, as well as EY – claim they can bring more resources to the work of crypto clients than smaller auditors. Larger auditors generally charge more than smaller companies.

The PCAOB, which regulates audits of US public companies, issued a bulletin in August telling companies they should check to see if their auditors had the right credentials.

“What is the auditor’s understanding of the financial reporting implications of business activities related to digital assets?” he asked. “What policies and procedures does the audit firm have regarding the conduct and follow-up of audit engagements involving digital assets, including consideration of the risks associated with conducting such audits?”

Answering the first question is not easy, auditors say, because innovations in digital assets have come faster than accounting standards can be set. The AICPA, a professional body that sets auditing standards for private companies, has written only a few chapters of a guide to auditing practices, and more are still in the pipeline.

“Our boards are always informed by current events and real-world scenarios and any additional potential risk they may arise,” said Susan Coffey, AICPA’s chief accounting officer.

Armanino, the auditor for FTX US, said he had “invested a lot of time and intellectual capital as an active participant in several accounting industry groups” to help develop standards.

Other audit firms are just glad they haven’t been involved in crypto.

“As I hope every audit firm, after the collapse of FTX, we went back to reviewing our portfolio of clients,” said Charly Weinstein, chief executive of EisnerAmper. For those with digital assets or cryptocurrency exposure, that was only a small fraction of the activity, he said.

“We didn’t do [audit] work around cryptocurrency,” he said. “Out of an abundance of caution.”

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