Two US senator have now taken their questions about the performance of the accounting companies that are active in the crypto industry to a higher power – the Public Company Accounting Oversight Board (PCAOB).
These senators coauthored a letter to the PCAOB chair asking how FTX exchange and other Crypto companies were audited and why these audits failed extremely. Failure to reveal supposed criminality and poor recordkeeping at FTX has tarnished the image of the PCAOB and the accounting profession, according to the senators.
In a letter that was addressed to PCAOB chair Erica Williams that dated January 25, Democratic Senators Ron Wyden and Elizabeth Warren pointed out allegations that former FTX CEO Sam Bankman-Fried made about passing audits by huge accounting companies Armanino and Prager Metis.
The current FTX CEO John Ray told a bankruptcy court that he had “substantial concerns as to the information presented in these audited financial statements.”
Furthermore, the senators questioned the companies’ impartiality, saying they acted as “crypto industry cheerleaders.”
Just sent from @SenWarren to @PCAOB_News: "We write regarding recent turmoil in the cryptocurrency industry following the collapse of
crypto platform FTX in Nov 2022 and the role that auditors may have played in misleading the public…" https://t.co/erbblBns9K pic.twitter.com/nDjenQ9awW
— blockchain tipsheet (@blockchaintpsht) January 26, 2023
Wyden and Warren mention William’s statement that PCAOB registered companies are just needed to meet the board’s standards “when they’re auditing a public issuer or broker-dealer under our jurisdiction, not for any other clients” and said that PCAOB rules seem to contradict Williams’ statement.
These senators also criticize proof of reserve reports. They said:
“In reality, proof-of-reserves examinations fall significantly short of real audits, as proof-of-reserves reports do not follow established standards, are not overseen by the PCAOB, and do not prove that listed assets belong to customers.”
The reason for their discussion of a procedure that is explicitly not subject to PCAOB oversight became clear in the 12 questions that they posed in the letter. They asked their first question:
“What risks do investors face when crypto firms – whether publicly traded or private – attempt to pass off proof-of-reserve examinations as ‘audits’ and what is the PCAOB doing to mitigate these risks?”
Wyden and Warren went on to seek confirmation that the PCAOB had taken all the needed measures concerning crypto sector auditors. They also ask whether Williams will:
“Commit to using your inspection authority to evaluate and publicly report on auditors that provided services for any crypto company acting as a broker-dealer, even if the firm was not registered as such with the SEC.”
Eventually, the lawmakers asked about the standards used to gauge auditors when they audit organizations with crypto asset holdings or shares in crypto firms. They stated that they hope to get an answer by February 8.
Warren is one of the Crypto sector’s most vocal critics. On the other hand, the former Senate Finance Committee chair, Wyden, has a more nuanced record on cryptocurrency.
He previously partnered with ‘crypto senator’ Cynthia Lummis in 2021 to propose a ‘fix’ to the crypto reporting needs in the Bipartisan Infrastructure Law. Notably, he also wrote letters to Binance, Bitfinex, Coinbase, Kraken, Gemini, and KuCoin in November asking about their consumer protections.
The PCAOB is a nonprofit organization set up by the United States federal government under the 2002 Sarbanes–Oxley Act. The SEC indicated in December 2022 that it will also be keeping a close eye on the auditors.