Recent events in the cryptocurrency industry highlight the risks for investors and customers—as well as auditors. This article summarizes the international, U.S. GAAP, and PCAOB auditing standards and practices relevant to audits of crypto companies. To better understand the auditing environment for, and the riskiness of, cryptocurrency companies, the audit reports and financial statements of 55 cryptocurrency companies publicly traded on U.S. markets for the years 2023 and 2022 are examined and profiled. Concerns about recent declines in audit quality in general and audits of cryptocurrency companies specifically are raised. Audits of private cryptocurrency companies are also addressed, including the now infamous FTX. Although progress is being made in accounting and auditing standards, more remains to be done, and further legislative and regulatory actions are needed to protect investors, customers, and other stakeholders.
Regulatory and Legislative Uncertainty
The regulatory uncertainty surrounding crypto assets creates ongoing business and accounting risks for crypto companies. While the SEC regulates securities and the CFTC regulates commodities, there is disagreement on whether most cryptocurrencies are securities or commodities, with only Bitcoin broadly accepted as a commodity. Despite lobbying by the crypto industry for separate regulations, the SEC has resisted, arguing that existing regulations are sufficient and that it has jurisdiction over securities. Meanwhile, Congress is considering various bills to provide clearer legal guidance on crypto regulation, but until bipartisan consensus and comprehensive legislation are passed, crypto companies will continue to face regulatory risks and challenges in accounting for different crypto assets.
Applicable Professional Standards
Global standards for financial reporting are primarily promulgated by FASB, which sets Generally Accepted Accounting Principles for both public and private companies in the United States, and the International Accounting Standards Board (IASB), which provides accounting standards for most of the rest of the world through its International Financial Reporting Standards (IFRS). Under existing IFRS, accounting for cryptocurrency holdings falls under either IAS 2, Inventories (if crypto-currencies are held for sale as part of business operations), or IAS 38, Intangible Assets. Under IFRS guidelines, both decreases and increases in the fair value of crypto assets are recognized using a fair value approach. Under U.S. GAAP, crypto assets are treated as intangible assets with indefinite useful lives and are valued at cost less impairment with subsequent increases in value not recognized, in accordance with ASC 350.
Audits of Publicly Traded Cryptocurrency Companies
The companies were overwhelmingly smaller companies, with 35 in the micro-cap or nano-cap categories. Of the U.S. companies, 14 filed as “emerging growth companies.” In 2023 (2022), 47 (51) companies reported losses, with not one company reporting profits in both years, demonstrating the challenges of profitability in the crypto industry. The 2023 results were not much better than 2022, even though the cryptocurrency market had turned around after hitting a low point in November 2022.
Ongoing Audit Quality Concerns for Public Company Audits
Audit quality remains a concern for regulators, investors, and other interested parties. There is no information available about the audit quality for the specific audits of the 55 companies in the sample. There is, however, evidence of a general increase in “flawed” audits. Based on the most recent publicly available PCAOB inspection reports, “serious” audit deficiencies increased “for nearly every category of the 157 audit firms the PCAOB inspected in 2022,” on which Erica Williams, chair of the PCAOB, commented “a 40% Part 1.A deficiency rate is completely unacceptable” (PCAOB, Chair Williams Statement on Rise in Audit Deficiency Rates, July 25, 2023, https://bit.ly/3KhFZRZ). Recent actions against some of the specific auditors in the sample of 55 companies are also troubling. Marcum, LLP, the auditor for six companies in the sample in 2023 and seven in 2022, agreed to pay a $10 million penalty to settle SEC charges that it had “systematic quality control failures and violations of audit standards in connection with audit work for hundreds of special purpose acquisition company (SPAC) clients” and these problems were “not limited to SPAC clients, but reflected systemic quality control failures throughout the firm” (SEC, “SEC Charges Audit Firm Marcum LLP for Widespread Quality Control Deficiencies,” June 21, 2023, https://bit.ly/3yJICcM).
Going Forward
There continue to be many concerns with the nascent crypto industry. There are some positive developments, however, not the least of which is FASB’s newly issued authoritative guidance on accounting and disclosure for crypto assets (ASU 2023-08). CPA firms, particularly the Big Four, are developing auditing tools to address crypto assets, and professional organizations are providing non-authoritative guidance for their members (e.g. AICPA & CIMA, “Accounting for and Auditing of Digital Assets Practice Aid,” Sep. 30, 2023, https://bit.ly/41jeM9t). As outlined above, there are numerous professional standards that are relevant to audits of crypto clients. There are also revised professional guidance and crypto practice updates from the PCAOB and others.
Leave a Reply