The senators co-authored a letter to the Public Company Accounting Oversight Board chair asking how FTX and other crypto firms were audited and why the audits failed so badly.
Two United States senators have taken their questions about the performance of accounting firms active in the crypto space to a higher power: the Public Company Accounting Oversight Board (PCAOB). Failure to uncover alleged criminality and poor recordkeeping at FTX has sullied the image of the PCAOB and the accounting profession, the senators said.
In a letter addressed to PCAOB chair Erica Williams and dated Jan. 25, Democratic Senators Elizabeth Warren and Ron Wyden point out claims former FTX CEO Sam Bankman-Fried made about passing audits by large accounting firms Armanino and Prager Metis. Current FTX CEO John Ray told a bankruptcy court that he had “substantial concerns as to the information presented in these audited financial statements.”
In addition, the senators question the firms’ 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
— blockchain tipsheet (@blockchaintpsht) January 26, 2023
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
Warren and Wyden mention Williams’ statement that PCAOB-registered firms are only required 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 point out PCAOB rules that seem to contradict Williams’ statement.
The senators also criticize proof-of-reserves reports. They write:
“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 actually belong to customers.”
The reason for their discussion of a process that is explicitly not subject to PCAOB oversight becomes clear in the 12 questions posed by the letter. They ask as 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?”
Warren and Wyden go on to seek confirmation that the PCAOB has taken all appropriate actions in relation to crypto industry auditors. They also ask if 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.”
Finally, the senators ask about the standards auditors are held to when they audit organizations with crypto asset holdings or shares in crypto companies. They say that they hope to receive an answer by Feb. 8.
Related: Senate Finance Committee Chair probes 'lack of safeguards' in crypto tax incentives
Warren is one of the crypto industry’s most vocal critics. Wyden, the Senate Finance Committee chair, has a more nuanced record on crypto. He partnered with “crypto senator” Cynthia Lummis in 2021 to propose a “fix” to the crypto reporting requirements in the bipartisan infrastructure bill. He also wrote letters to Binance, Coinbase, Bitfinex, Gemini, Kraken and KuCoin in November to ask about their consumer protections.
The PCAOB is a nonprofit corporation set up by the U.S. federal government under the 2002 Sarbanes–Oxley Act. The SEC indicated in December that it too would be keeping a closer eye on auditors.
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