With its intent to counteract cryptocurrency, the U.S. Securities and Exchange Commission (SEC) is beginning to audit firms that work with crypto companies as part of their mission.
In recent months, auditing firms have been under scrutiny by industry observers, analysts, and investors following the failure of the multi-billion crypto firm FTX. Although the accounting firm that conducted the audit issued a statement claiming that FTX’s financial statements were “fairly stated,” they still faced criticism for not detecting any red flags with this company’s finances.
The accounting company’s declaration countered the remarks given by John Ray III, who had just taken control of FTX. He declared that there was a “complete failure in corporate controls” and an “absolute lack of dependable financial information.” His perspective conflicted with those put forth by the accounting firm.
SEC is not convinced with accounting firms in the crypto market
After the crypto exchange platform fell apart, investors were shaken with doubt. Binance immediately took action to restore investors’ confidence and publicized its evidence of reserves. They even hired Mazars, an esteemed accounting firm, to affirm the assets kept in store.
Unfortunately, other CEXs followed suit but experienced much condemnation from members within cryptocurrency communities – dubbing it ‘Fraudit’ (a combination of fraud and audit).
In an unexpected turn of events, the SEC has begun to investigate and increase its oversight of active accounting firms in the cryptocurrency sector. According to one of the officials at this regulatory body, they are worried investors may be misled by reports from these firms, which would lead them to have a false sense of security.
In an interview with the Wall Street Journal, the SEC’s acting chief accountant Paul Munter sounded a clear warning to investors, urging them to be suspicious of unfounded assertions from crypto companies.
We’re working hard at comprehending what is taking place in this industry”
Paul Munter, SEC’s acting chief accountant
Additionally, if any concerning patterns emerge, they will not hesitate to refer such cases for enforcement action.
SEC warns investors against proof of reserves from audit firms
“Investors should not rely too heavily on a company’s declaration that they have proof of reserves from an audit firm,” cautioned Munter, a SEC official. She explained that this report alone is insufficient for investors to gauge whether the business has enough resources to take care of its liabilities.
Yevheniia Broshevan, CBO of Hacken — a blockchain security firm specializing in auditing, crowdsourced security, pen testing, and more – pointed out the difficulty of such audits to International Business Times, stressing that the issue is that exchanges rarely complete these sorts of audits.
The audit for FTX US was conducted back in 2021, and it’s been nearly a year since then – an alarmingly lengthy time frame.
Yevheniia Broshevan, CBO of Hacken
Recently, Mazars revealed evidence of their audit findings for companies such as Binance, Crypto.com, and other crypto exchanges; however, this week, they declared that it had parted ways with all clients involved in the cryptocurrency industry. In a statement by email, the auditing firm emphasized their apprehension about how people at large perceive these reports.
