Bloomberg Law
Jan. 3, 2023, 10:00 AM

Auditors Spurn Crypto After FTX, Misleading Reserve Estimates

Amanda Iacone
Amanda Iacone
Nicola M. White
Nicola M. White

In the rush to reassure customers and the markets, crypto exchanges like Kraken and Binance Holdings Ltd. in 2022 touted auditor-provided tests of their reserves testing to show customer deposits were safe.

But those reports—point-in time snapshots of reserves that don’t reflect fund volatility or outstanding obligations—failed to reassure jittery customers and regulators, including Securities and Exchange Commission Chair Gary Gensler. Instead of offering a lifeline to crypto firms, the practice of vetting collateral triggered renewed scrutiny from regulators and provided fresh ammunition for auditor critics.

Risk-adverse auditors are now rethinking their relationship with crypto players after the risks of working with the industry were laid bare in the bankruptcy filings for collapsed exchange FTX, whose founders face criminal charges.

Mazars Group, Marcum LLP, and Armanino LLP have said they would reconsider their crypto industry work after the implosion of FTX and a flurry of bankruptcies including bitcoin miner Core Scientific Inc. created panic in the market. Pulling back on crypto could limit the firms’ reputational and legal risks that could undermine investor confidence in work auditors provide for their publicly traded clients.

But skepticism of the proof of reserves testing has raised questions about why some auditors agreed to perform this type of work.

“They wanted in on what was perceived to be the next hot industry,” Poppy Alexander, a partner with Constantine Cannon LLP who represents SEC whistleblowers, said of accounting firms. “They wanted to touch what seemed like gold.”

Risky Business

Exchanges and other players in the often opaque industry bring a host of risks for auditors. To start, many offshore businesses operate beyond the reach of US regulators. Gaps in audit and accounting standards, which don’t address digital currencies or tokens, add to the challenges for auditors.

“There’s huge liability with this,” said Kyle Welch, an assistant accounting professor at George Washington University. “When it comes to the audit, their name is on the line at the end of that book.”

Many crypto businesses are relatively young and are developing their accounting teams and building up internal governance checks. Audit firms weigh that level of maturity when they decide whether to work with clients. They also factor in what level of service they could provide, and whether they can meet those needs, said Brian Neil Hoffman, a partner with Holland & Hart LLP.

How firms make that calculation varies based on the expertise of their staff, their risk appetite, and business goals.

Deloitte, Ernst & Young, KPMG, and PwC, behemoths of the audit industry, have generally steered clear of providing assurance services for crypto-involved companies. Still, affiliates of those Big Four firms have at least a dozen such audit clients listed on public stock exchanges globally including Coinbase Global Inc., WisdomTree Inc., Northern Data AG, and Bitfarms LTD/Canada—companies that meet strict audit, disclosure, and other regulatory requirements that come with a public listing.

US affiliates for Deloitte and EY did not respond to requests for comment; PwC and KPMG declined to comment.

Even outside of crypto challenges, CPA firms were already facing mounting pressure from the SEC. The regulator has put auditors, critical market gatekeepers, on notice to stick to its core mission: to challenge corporate accounting and provide a true check on management.

“They will not be shy about opening investigations or taking action,” Hoffman said of the SEC’s auditor oversight.

Proof of reserve reports also have grabbed the attention of Gensler, who told Bloomberg News that the asset snapshots aren’t sufficient to protect investors.

Marcum Chairman and CEO Jeffrey Weiner said that the firm had raised its risk monitoring assessments for determining whether to take on new crypto clients and continue working with existing clients. The firm, which does not offer of proof of reserve reports, had not yet decided whether to pull out of the industry entirely. “Most lay people don’t understand what’s in it versus what is not,” Weiner said.

‘Flying Colors’

How the market perceives auditors’ work and the chance that the limitations of that work could be misunderstand is another risk that comes with crypto clients. Backlash could spill over and taint the investor confidence in auditors work for their public company clients.

Crypto businesses sought auditors help to demonstrate that they had enough funds on hand to cover depositor claims, hyping the point-in-time snapshots to customers even though they fall far short of traditional financial statement audits. Those proof of reserve reports don’t vet a company’s total financial health or assess their ability to continue operating in the months ahead, nor do they show an exchange’s total liabilities.

Crypto exchange Kraken touted “next-generation audit standards” that showed how the exchange was “exceeding the transparency offered by legacy financial firms,” the firm announced in February.

Yield App’s website announced the crypto wealth platform passed a “stringent” reserves audit “with flying colors” in January.

“It’s just inaccurate to say this is an audit,” said Aaron Jacob, head of accounting solutions at TaxBit, a cryptocurrency software company. “Firms have to think, ‘What risks are we subjecting ourselves to if our client is saying this is an audit and they’re telling the market something that it’s not?’”

The reports accounting firm Armanino wrote for Kraken and Yield App detailing its findings were more measured and technical than what their clients announced via press release. The firm, which analyzed assets on a single day, said they were limited only to demonstrating that outstanding customer liabilities are adequately reserved by the assets held by both companies.

Armanino LLP, the firm that audited FTX US—an arm of collapsed crypto exchange FTX—previously told the Financial Times that it was halting its financial statement audits and no longer providing proof of reserve reports for companies in the industry. Armanino did not respond to requests for comment.

Crypto exchange Binance Holdings Ltd. promoted its proof of reserve report as a sign of transparency, but is now downplaying the report’s significance after negative publicity caused the auditor it hired, Mazars, to remove the report from its website and quit offering proof of reserve reports entirely.

A proof of reserves report is “just the first of many steps” the exchange plans in the weeks ahead as it aims to be more transparent about the health of the company and the collateral it has on hand, Binance said in a statement.

Francine McKenna, a longtime critic of the audit industry who teaches financial accounting at the Wharton School of Business, blamed audit firms for selling these services to companies eager to allay market fears. She called the reports a number matching exercise.

“They ginned up this agreed-upon procedures report that didn’t fool anybody,” McKenna said. “Even the crypto devoted are skeptical. They’re worried. They’re worried about customer assets going missing; they’re worried about the stable coins crashing.”

To contact the reporters on this story: Amanda Iacone in Washington at; Nicola M. White in Washington at

To contact the editor responsible for this story: Jeff Harrington at

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