(BeInCrypto; ICAEW Insights, Nicodemus) As the use of cryptocurrency and blockchain technology grows, the importance of reliable crypto audits becomes evident – especially in the aftermath of the FTX debale. As it turns out though, this task of auditing crypto firms can be more challenging than examining normal financial companies.
An audit is a comprehensive evaluation of a company’s financial records. It is performed by an independent third party. It has the goal of providing assurance that a company’s financial statements accurately reflect its financial position. In traditional finance, audits play a crucial role in building trust and confidence in a company’s operations and financial health.
However, the audit process in the rapidly evolving world of cryptocurrency has proven more challenging. Star investor Michael Burry has voiced skepticism towards audits of cryptocurrency exchanges such as Binance and FTX. In an interview, Burry argued that these audits are “essentially meaningless.” He cited the inexperience of auditors in the field as reasons for his skepticism.
In response to this lack of expertise, accounting firm Mazars Group has halted its proof-of-reserves audits for crypto companies. The firm cited media scrutiny and a lack of market confidence in its reports as the reasons for this decision. Binance CEO Changpeng Zhao also commented on the issue. He stated that most accounting firms do not have the necessary expertise to effectively audit cryptocurrency exchanges. He emphasized the importance of investing in training and education to competently evaluate the operations of crypto companies.
Views on how to account for crypto are also diverging internationally. The Financial Accounting Standards Board (FASB) recently announced a move towards fair value accounting, where in the recent past IAS 2: Inventories and IAS 38: Intangibles have been the predominant standards applied. It means that auditors must rely on the interpretations of their firms or advisory decisions by international accounting policy setters.
One main challenge in the cryptocurrency industry is the lack of experienced auditors. The unique nature of cryptocurrency, with its decentralized and often complex structures, requires specialized expertise that many auditors don’t possess. This lack of experience can lead to audit failures or shortcomings. In 2019, accounting firm Grant Thornton’s audit of Cryptopia, a New Zealand-based cryptocurrency exchange, proved to be a failure. The exchange collapsed just months after the audit report gave it a clean bill of health. The report was later criticized for not adequately identifying the exchange’s financial risks.
To address this experience gap, auditors must invest in education and training to develop the necessary skills and knowledge to competently audit cryptocurrency exchanges. This can be challenging, as the field of cryptocurrency and blockchain technology is constantly evolving and new developments emerge rapidly. Without this investment in training, the audit process in the crypto world will continue to be hampered by a lack of experienced auditors.
In addition to the challenges faced by auditors, crypto companies also face hurdles in securing reliable audits. One important type of audit in the cryptocurrency industry is the proof-of-reserves audit, which verifies that a company holds the amount of digital assets it claims to hold. This is particularly important in the crypto world, where concerns about fraud and mismanagement are not uncommon. Without reliable proof-of-reserves audits, it is difficult for investors and the general public to have confidence in a company’s operations and financial health.
However, securing a reliable proof-of-reserves audit can be a challenge for crypto companies. Many firms are scared to work with crypto companies, as Binance CEO Changpeng Zhao has noted. This has led some companies to turn to specialized firms or to develop their own in-house audit processes in order to provide assurance to investors and the public.
Also due updated IFRS reporting standards pertaining crypto companies some companies are essentially required to restate the last 2 years of financial statements. This has created a tremendous amount of extra work for those companies and auditors.
