With the increasing use of cryptocurrencies and blockchain technology, the importance of reliable auditing is becoming apparent – especially in the wake of the FTX debacle. The different challenges for audit firms in the crypto space.
An audit is a comprehensive evaluation of a company’s financial records. It is carried out by an independent third party. Their objective is to ensure that a company’s financial statements accurately reflect its financial situation. In traditional finance, audits play a vital role in building confidence in a company’s operations and financial health.
However, the verification process has proven to be more difficult in the fast-paced world of cryptocurrencies. Star investor Michael Burry has expressed skepticism about audits of cryptocurrency exchanges such as Binance and FTX. In an interview, Burry argued that these reviews were “essentially meaningless”. He cited companies’ inexperience in this area as the reason for his skepticism.
Lack of experienced auditors
In response to this lack of expertise, accounting firm Mazars Group has suspended its proof of reserves audits of crypto companies. The company justified this decision by the critical eye of the media and the lack of confidence of the market in its reports. Binance CEO Changpeng Zhao also commented on the issue. He explained that most auditing firms lack the expertise to effectively audit crypto exchanges. He stressed the importance of investing in training and education. Only in this way can the operations of crypto companies be competently assessed.
One of the biggest challenges in the cryptocurrency industry is the lack of experienced auditors. The uniqueness of cryptocurrencies, with their decentralized and often complex structures, requires special expertise that many auditing firms do not possess. This lack of experience can lead to errors or gaps in the exam. In 2019, audit firm Grant Thornton’s audit of Cryptopia, a New Zealand-based cryptocurrency exchange, was found to be a failure. The exchange collapsed just months after the audit report gave it a positive review. The report was later criticized for failing to correctly identify the exchange’s financial risks.
To fill this experience gap, auditors need to invest in education and training to develop the skills and knowledge needed to competently audit cryptocurrency exchanges. This can be difficult as the field of cryptocurrency and blockchain technology is constantly evolving and new developments are emerging rapidly. Without this investment in education, the auditing process in the crypto world will continue to be hampered by a shortage of experienced auditors.
Crypto Companies and the Verification Process
Apart from the challenges that auditors face, crypto companies also face hurdles in ensuring reliable audits. A key type of audit in the industry is the proof of reserves audit, which verifies ownership of the amount of digital assets claimed by a company. This is especially important in the world of cryptocurrency, where concerns about fraud and mismanagement are not uncommon. Without reliable reserve records, it is difficult for investors and the public to have confidence in a company’s operations and financial health.
However, ensuring reliable proof of reserves can be a challenge for crypto companies. Many companies are afraid to partner with crypto companies, as noted by Binance CEO (Changpeng Zhao). This has prompted some companies to turn to specialist firms or to develop their own internal audit procedures to reassure investors and the public.