​SEC increases oversight of auditors’ work in the field of cryptocurrencies

The Securities and Exchange Commission is stepping up scrutiny of the work that audit firms are doing for cryptocurrency companies, concerned that investors may be getting a false sense of reassurance from the firms’ reports, a senior official at the regulator said.

“We’re warning investors to be very wary of some of the claims that are being made by crypto companies,” Paul Munter, the SEC’s acting chief accountant, said in an interview.

Increased scrutiny has led at least one audit firm to drop crypto clients, in some cases soon after producing reports on the companies’ assets and liabilities. Crypto companies are eager to get the blessing of an auditor to reassure their skittish clients.

The Wall Street watchdog is looking closely at how crypto companies are portraying their reports from audit firms, according to Mr. Munter. Many of these companies are closely held or based offshore, and so unlikely to fall within the regulator’s remit. The SEC is effectively sending a warning to audit firms, which don’t want to run afoul of their regulator, as well as putting investors on alert.

“We are increasing our understanding of what’s going on in the marketplace,” Mr. Munter said. “If we find fact patterns that we think are troublesome, we will consider a referral to the division of enforcement.”

The regulator is worried particularly about so-called proof-of-reserves reports, which aim to show that the crypto company has sufficient assets to cover customers’ funds. Companies have rushed to produce these reports in recent weeks, using the credibility of audit firms to try to reassure customers spooked by the collapse of crypto exchange FTX.

Binance, the biggest crypto exchange, this month showcased what its chief executive called an “audited proof of reserves.” The proof of reserves had been independently verified by audit firm Mazars, a Binance spokesman said. The report contained sparse financial information and Mazars didn’t express an opinion, meaning it wasn’t vouching for the numbers.

Some proofs of reserves don’t even disclose what those numbers are. A report for exchange Crypto.com this month said the “nominal amounts of assets and liabilities are not disclosed in this report due to confidentiality reasons.” The same Mazars partner in South Africa signed off on both the Crypto.com and Binance reports.

“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,” the SEC’s Mr. Munter said. Having such a report “is not enough information for an investor to assess whether the company has sufficient assets to cover its liabilities,” he added.

A Crypto.com spokesman said the company is confident in its report. Getting a full-blown audit done after FTX collapsed would have taken too long, given the crisis of confidence in the sector, a person close to the company said.

“Ultimately, our users want to know that their funds are secure and that our business is financially strong,” Binance said in a statement. “We embrace additional transparency and we are looking into how best to provide this in the coming months.”

Mazars last week said it was pausing doing proof-of-reserves crypto work and pulled copies of the reports from its website. A spokesman for the accounting firm said it had made the move “due to concerns regarding the way these reports are understood by the public.”

Other audit firms are also reassessing their work for crypto companies, concerned by the risk of lawsuits, reputational damage and heightened regulatory scrutiny, according to industry insiders.

“We’re rating the whole industry as high risk,” said Jeffrey Weiner, the chairman and chief executive officer of accounting firm Marcum LLP. “We’re being careful about which clients we keep, which clients we take on.”

Audit firm BDO is also looking at which clients to take on or retain, as part of a wider review of the work it does for crypto companies, a spokesman said last week.

The high-profile scrutiny of FTX’s external auditors, after the crypto exchange filed for bankruptcy, showed the risks of signing off on numbers that may be unreliable. Two U.S. accounting firms, Prager Metis CPAs LLC. and Armanino LLP, audited units of the FTX empire, helping to reassure investors in the multibillion-dollar company.

John J. Ray, FTX’s new chief executive, last month said the audited statements couldn’t be relied on. Prager Metis and Armanino, which didn’t respond to requests for comment, have previously said they stand by their work for FTX.

The common lack of effective internal controls at crypto companies, a factor in the FTX blowup, heightens the risk of errors in the financial statements. That is one reason why the biggest audit firms, which can afford to be most choosy about which clients they take on, have largely steered clear, according to industry insiders.

A look at 19 publicly traded crypto mining companies found none is currently audited by Deloitte, Ernst & Young, KPMG or PricewaterhouseCoopers, according to Bedrock AI, which makes software that analyzes financial filings.

“The Big Four firms have…rightly decided the risks [of auditing crypto companies] are extremely high,” said Jeffrey Johanns, accounting professor at the University of Texas at Austin, and a former partner at a Big Four firm. “They’re very reluctant to move into the space, especially at a lower level of service than a full audit, which in my view is the only level appropriate for these types of entities.”

One crypto giant apparently shunned by the Big Four is Binance. After it was dropped by Mazars, the exchange said it was still looking for another audit firm. Binance “reached out to multiple large firms, including the Big Four, who are currently unwilling to conduct a [proof of reserves] for a private crypto company,” the company said.

Representatives of Deloitte, EY, KPMG and PwC declined to comment.

This material is taken from the website wsj.com.