The PCAOB’s Office of the Investor Advocate has warned investors that while crypto companies may use Proof of Reserve (PoR) reports to bolster consumer confidence, they are not formal, rigorous audits, do not provide “any meaningful assurance to investors and the public,” and are not conducted using uniform audit standards.
The POR reports offer verification of assets on hand, but only for a specific point in time and are “subject to significant limitations based on the procedures performed,” the advisory said. The reports have come under fire following the collapse of crypto exchange FTX and the arrest in the Bahamas of former CEO Sam Bankman-Fried on wire fraud and other allegations.
Immediately following the FTX meltdown, Mazars Group has halted work with crypto firms across the globe, including Crypto.com, KuCoin and Binance, the largest crypto exchange. In an announcement, Mazars said the stoppage was prompted by a lack of assurance in the POR reports it had already published. San Ramon, Calif.-based IPA 100 firm Armanino LLP (FY21 net revenue of $444.1 million), which was named in a class-action lawsuit in connection with audit work related to FTX, ended its crypto audit practice after eight years.
Because the reports assess digital assets at one point in time, according to the PCAOB, “they do not provide any assurance about whether the assets were used, lent or otherwise became unavailable to customers following issuance of the PoR report. Moreover, PoR reports also provide no assurance regarding the effectiveness of internal controls or of governance of the crypto entity.”
Problems with these reports include that the crypto entity determines the assurance procedures to be performed and the report only offers findings on those results. The procedures themselves are not under scrutiny. The reports also do not include an opinion on the amount of the reserves, the financial stability of the entity or the validity of management’s assertions.
The advisory ends with this statement, published in bold type: “Proof of reserve reports are inherently limited, and customers should exercise extreme caution when relying on them to conclude that there are sufficient assets to meet customer liabilities.”
