Accounting Giants Cut Ties With Crypto Clients
In the aftermath of the FTX collapse, Mazars along with Armanino were brought in by major players in the crypto industry to provide proof of reserves audits, giving reassurance to customers that the respective companies are indeed solvent, and hold enough funds to cover withdrawal requests.
Yet just weeks later, both auditors have halted their work with high-profile crypto clients, citing concerns about how such reports are being interpreted and understood.
The FTX Fire Continues To Rage
FTX founder, Sam Bankman-Fried, has been extradited to the US to face charges of wire fraud, securities fraud, money laundering, and campaign finance violations, among others.
SBF, as he was once fondly known, essentially siphoned off customer funds “to make undisclosed venture investments, lavish real estate purchases, and large political donations”, according to the SEC.
FTX’s collapse and Bankman-Fried’s arrest have made headlines around the world. And the impact on the crypto industry has been huge. Other well-known exchanges are now facing questions about their ability to pay customers should another ‘run on the bank’ type event occur.
Mazars Cuts Halts Work With Binance, Crypto.com & KuCoin
In an effort to shore up support and confidence among customers, Binance, KuCoin and Crypto.com turned to proof of reserves audits. These reports, conducted by a third party, verify that an exchange has enough assets at that point in time to cover en-masse customer withdrawals.
However, Mazars is concerned that too much emphasis is being placed on the depth and credibility of these reports. The auditor said in a statement: “They do not constitute either an assurance or an audit opinion on subject matter. Instead they report limited findings based on the agreed procedures performed on the subject matter at a historical point in time.”
Basically, proof of reserves reports only look where the crypto company wants them to. And while an accurate snapshot at a particular moment in time, they don’t look at the liabilities of Binance’s lending arm, for example.
With these pitfalls not being understood by many aspiring crypto investors, Mazars has suspended its work with Binance, Crypto.com and KuCoin.
Popular American auditor, Armanino, has gone even further and announced it’s closing its cryptocurrency audit practice. The mid-sized auditor is worried about the reputational damage its affiliation with the crypto industry and the now bankrupt FTX could have on its non-crypto business.
A Bleak Outlook
Binance has also been hit by over $4 billion in customer withdrawals this month, and despite saying it has adequate capital to meet such volumes, it doesn’t paint a picture of long-term prosperity.
In addition, none of the largest accountants, namely the ‘Big Four’ (Deloitte, EY, PwC, KPMG), are willing to audit these high-profile crypto exchanges, partly because they don’t understand how to audit crypto assets and different blockchains.
So with auditors keeping a wide berth, the biggest exchanges seeing huge cash outflows, plus the price of tokens like Bitcoin losing most of their value this year, it’s now more important than ever to understand the safest ways to trade cryptos.