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Auditing Cryptocurrency Companies

Auditing Cryptocurrency Companies

  • 25.03.2025 09:34
  • cpajournal.com
  • Keywords: High Risk

The article examines risks and challenges in auditing cryptocurrency companies, highlighting declining audit quality and regulatory uncertainties. It analyzes 55 publicly traded crypto firms' financial statements and audit reports, raising concerns about transparency and accountability. The piece underscores the need for improved accounting and auditing standards to protect stakeholders amid industry volatility.

Coinbase ReportsCOINsentiment_satisfied

Estimated market influence

Coinbase Global

Coinbase Global

Positivesentiment_satisfied
Analyst rating: Buy

Coinbase is a major cryptocurrency exchange listed on the NASDAQ, which has been subject to increased regulatory scrutiny but remains a key player in the crypto market.

FTX

Negativesentiment_dissatisfied
Analyst rating: N/A

FTX collapsed in November 2022, leading to significant financial losses for its users and raising concerns about the stability of cryptocurrency exchanges.

Context

Analysis of Auditing Cryptocurrency Companies

High-Risk Industry

  • Recent Failures: FTX (November 2022 bankruptcy) and Binance faced legal issues, with their CEOs indicted or pleading guilty to serious charges.
  • Fraud and Scams: Activities in the crypto industry involve significant risks such as market manipulation, fraud, theft, and legal uncertainties.

Regulatory and Legislative Uncertainty

  • Regulatory Definitions: Bitcoin is widely recognized as a commodity, but other cryptocurrencies face uncertainty between being classified as securities or commodities.
  • Lobbying Efforts: The crypto industry has lobbied for specific regulatory frameworks, while the SEC maintains existing regulations are sufficient.
  • Congressional Action: Various legislative bills aim to clarify crypto regulation, though no definitive framework exists yet.

Applicable Professional Standards

  • FASB Updates:
    • Exposure draft on crypto accounting issued in March 2023.
    • ASU 2023-08 effective for fiscal years starting after December 15, 2024.
  • IFRS Guidance: Cryptocurrency holdings fall under IAS 2 or IAS 38.
  • US GAAP Treatment: Crypto assets are intangible with indefinite useful lives, valued at cost less impairment.

Global Auditing Standards

  • IFAC and Forum of Firms: Commit to global auditing standards set by IFAC, including the AICPA and CPA Canada.

Client Relationships and Risk Management

  • Integrity Checks: Auditors must assess client integrity before accepting engagements.
  • Noncompliance (NOCLAR): Auditors are responsible for addressing illegal acts affecting financial statements.
  • Material Misstatement Risk: Inherent, control, and detection risks influence audit approaches.

Audits of Publicly Traded Companies

  • Sample Analysis: 55 publicly traded crypto companies were analyzed for their 2023 and 2022 financial statements and audit reports.
  • Exhibit 1: List includes major players like Coinbase Global, MicroStrategy, and Bitcoin-focused ETFs.
  • Exhibit 2: Key auditors and number of clients:
    • Marcum LLP: 6 (2023), 7 (2022)
    • KPMG: 5 (2023), 5 (2022)
    • MaloneBailey: 5 (2023), 4 (2022)

Market Implications

  • Declining Audit Quality: Concerns raised about audits of crypto companies, with FTX as a notable example.
  • Investor Protection: Need for stronger regulatory and auditing standards to safeguard investors and stakeholders.

Strategic Considerations

  • Regulatory Compliance: Crypto companies must navigate evolving legal frameworks to avoid penalties and maintain trust.
  • Auditor Vigilance: Auditors need to remain alert to risks like fraud, misstatements, and noncompliance in the volatile crypto sector.

Long-Term Effects

  • Industry Maturity: Improved accounting and auditing standards could enhance investor confidence and industry stability.
  • Regulatory Evolution: Ongoing legislative efforts may shape the future regulatory landscape for cryptocurrencies.