In the aftermath of FTX's demise, a pair of Democratic senators urged the Public Company Accounting Oversight Board (PCAOB) to investigate so-called "sham audits" of cryptocurrency companies by registered auditors.
Senators Elizabeth Warren (Mass.) and Ron Wyden (Ore.) have expressed concerns to the PCAOB regarding the "independence and methodology" of audit firms working for cryptocurrency companies, urging the agency to "ensure auditor accountability and the credibility of the auditing system."
“When PCAOB-registered auditors perform sham audits—even for firms that may lay outside of the PCAOB’s jurisdiction—they tarnish the credibility of the PCAOB and undermine confidence in the PCAOB-registered auditors that investors and the public rely on when making investment decisions,” wrote the senators Wednesday in a letter addressed to PCAOB Chair Erica Williams.
The PCAOB has no jurisdiction over audit-related work performed at cryptocurrency companies that are not publicly traded. However, the senators pressed Williams to hold those corporations accountable for the work they do for cryptocurrency companies.
"[I]f the auditors who evaluate huge public businesses are the same ones who whitewash 'audit' reports for crypto enterprises with established records of misconduct," the senators said in a press release.
Senators directed their ire at organisations that had done work for FTX, a list that purportedly includes Big Four consulting services from Deloitte and PwC. In the days preceding up to its November bankruptcy, the cryptocurrency exchange boasted that it had passed generally accepted accounting standards (GAAP) audits undertaken by Armanino and Prager Metis.
The senators wrote that Armanino and Prager Metis "failed to identify the alleged 'old-fashioned embezzlement,' 'unprecedented' lack of recordkeeping,' and 'utter failure of corporate controls' at the heart of FTX's collapse," citing comments made about the exchange by its new Chief Executive John Ray, who is overseeing the company's bankruptcy.
Aside from FTX, the senators cited "proof of reserve" reports created by audit firms for cryptocurrency companies as questionable. The reports purport to evaluate cryptocurrency companies' financial health by claiming they have adequate funds to cover consumer deposits, but their findings "fell substantially short of true audits," despite crypto companies presenting them as such, according to the lawmakers.
The senators ordered that Williams respond by February 8 to a series of questions concerning what the PCAOB, which is governed by the Securities and Exchange Commission (SEC), is doing to offset the possible harm to the auditing profession caused by these activities.
They questioned whether the PCAOB had the ability to deregister auditors "if they offer services or participate in conduct that falls short of PCAOB norms and rules, even if those acts are conducted in connection to private, non-SEC registered corporations." Another question suggested that the PCAOB describe "the standards by which auditors must abide when evaluating the risk of exposure to crypto firms or validating the valuation of crypto investments" because banks, publicly traded companies, and registered investment firms have crypto assets on their books.
In a separate address presented Wednesday at an American Economic Liberties Project virtual event, Warren stated that cryptocurrency firms should be controlled by the SEC, either with existing instruments or with additional authority granted by Congress.
“The SEC has a long history of fighting exactly the battles that we now face,” she said. “From the time of the commission’s creation, its job has been to protect consumers by making sure that investors have access to the whole truth about investment risks, that they’re treated fairly in the market, and that wrongdoers face meaningful consequences.”
Other regulatory bodies, such as the Commodity Futures Trading Commission (CFTC), have claimed to be the best alternative for regulating cryptocurrencies. CFTC Commissioner Christy Goldsmith Romero argued in December that the agency should strengthen cryptocurrency regulation using the tools it already has, while CFTC Chairman Rostin Behnam asked Congress last July to give the agency new authority to monitor the market.
By fLEXI tEAM