Two high-ranking Democrats on the Senate Finance Committee accused the US audit regulator Wednesday of ignoring the work of large accounting firms in “whitewashing ‘audit’ results for crypto firms,” jeopardizing investor confidence in public company audits.
Senators Ron Wyden, who chairs the finance committee, and Elizabeth Warren urged the Public Company Accounting Oversight Board to ensure it was doing enough to hold audit firms registered with the board accountable for their work with crypto clients, whether they are private businesses or listed stocks, according to a letter they sent to board Chair Erica Williams.
“Ongoing reports of scandalous accounting practices in the crypto industry raise questions about crypto accounting firms’ independence and the methods they employed to assess the integrity of crypto firms’ financial statements, underscoring the need for the Public Company Accounting Oversight Board (PCAOB) to act to ensure accountability,” the senators wrote. “When PCAOB-registered auditors perform sham audits—even for firms that may lay outside of the PCAOB’s jurisdiction—they tarnish the credibility of the PCAOB and undermine confidence in the PCAOB-registered auditors that investors and the public rely on when making investment decisions.”
“These misleading financial reports shake our confidence in the entire auditing industry,” the letter states.
Congress created the regulatory board in 2002 to restore investor trust in corporate accounting after the collapse of Enron Corp. and WorldCom Inc. by giving it the authority to oversee the audits of publicly traded companies, and later brokerage firms. The current five-member board has pledged to protect investors through tougher enforcement of audit violations and setting a higher bar for public company audits.
The board late Wednesday confirmed that it received the lawmakers’ letter. “We look forward to working with them on our shared goal of protecting investors,” a PCAOB spokesperson said.
Wyden, who represents Oregon, and Warren, of Massachusetts, suggest that the oversight board should go beyond its mandate of overseeing firms conducting public audits and weigh in on audits of private crypto companies. The two lawmakers asked for the board to respond to a dozen questions by Feb. 8.
Among other issues, Warren and Wyden want the PCAOB to dig deeper into past inspection deficiencies of audit firms who worked with collapsed crypto exchange FTX, a privately-held company, whether their work for that client violated any of the board’s rules, and whether the board had warned FTX’s auditors about potential conflicts of interest.
New York-based Prager Metis CPAs LLC audited FTX Trading Ltd. and Armanino LLP, headquartered in San Ramon, Calif., audited FTX US.
FTX’s stunning collapse made investors, watchdogs, and the man in charge of combing through the wreckage of the failed crypto exchange to question how the auditors missed FTX’s red flags.
John J. Ray III, who oversaw Enron’s liquidation, called out FTX’s auditors in a November bankruptcy court submission, citing “substantial concerns as to the information presented in these audited financial statements.” Ray described the crypto exchange’s implosion as a “complete failure of corporate controls and a complete absence of trustworthy financial information.”
The lawmakers also asked the board about any steps the regulator is taking to protect investors “when crypto firms—whether publicly traded or private—attempt to pass off proof-of-reserve examinations as “audits.”
Auditors began to retreat from offering such services to crypto companies after a series of proof of reserves tests failed to reassure jittery crypto customers that their assets were safe late last year and the risks of working with such clients were made clear by the FTX bankruptcy filings.
Williams previously said that the board’s hands were tied because it didn’t have the authority to review the work of audits for private companies like FTX, but that the board reviews audits involving cryptocurrencies as part of its inspection process.
As a private business, neither FTX nor exchange Binance Holdings Ltd. registered with the Securities and Exchange Commission, and so the work of their auditors is not subject to the board’s scrutiny or oversight.
Under the 2002 Sarbanes-Oxley Act, Congress limited the board’s authority to companies that file reports with the Securities and Exchange Commission. After the collapse of Bernie Madoff’s investment firm exposed a gap in the board’s jurisdiction, lawmakers extended the agency’s oversight to auditors of broker-dealers, said Dan Goelzer, a founding PCAOB member and former general counsel to the SEC.
“If Congress feels that the PCAOB ought to be looking at the work of auditors in the crypto space, they should change the statute to give the board that power,” Goelzer said.
“It’s under Congress’ control,” he said.
Binance in December attempted to assuage the market about its stability by promoting what’s called a proof of reserve report—a point-in-time snapshot of the platform’s holdings. The company touted the report as a sign of transparency, but had to downplay its 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.
—With assistance from Nicola White
