SEC’s Chief Accountant Flags Crypto “Assurance” Work
On July 27, Paul Munter, the Chief Accountant of the U.S. Securities and Exchange Commission (SEC), published “The Potential Pitfalls of Purported Crypto ‘Assurance’ Work.” Munter addressed accounting firms’ obligations when performing non-audit work for crypto companies – especially, crypto asset trading platforms – which he says is a particular concern in the wake of recent crypto scandals and accounting firms’ “vital gatekeeper role.”
First, accounting firms and crypto clients should be careful when describing the non-audit work being provided by the firm and avoid giving investors the mistaken belief that such work is comparable to or more precise than financial statement audits. The SEC will be looking closely at representations about accounting firms’ non-audit work for antifraud violations, including primary and secondary violations by the accounting firms and their employees, and accounting firms should consider a noisy withdrawal and reporting to the commission if they determine a client made misleading statements.
Second, accounting firms should be cautious when taking on new clients from the crypto space and consider engagement letters that prohibit “misleading references to ‘audit,’ ‘GAAS,’ ‘PCAOB standards,’ and ‘PCAOB inspections.’”1
Third, accounting firms that might want to perform audit work in the future for prospective non-audit crypto clients should be mindful of Rule 2-01 of Regulation S-X, which ensures that auditors are independent of their clients and avoid creating any appearance of conflict or mutual interest between themselves and their clients or any entities under their clients’ common control.
Investors rely on public disclosures when making investment decisions, and the SEC views accounting firms as “vital gatekeepers” in the reporting process. Accounting firms should be mindful of their professional obligations when engaging in non-audit activities for crypto clients to avoid undermining the investing public’s confidence in the profession. Munter’s statement provides several key takeaways for accounting firms engaging in non-audit practices for crypto trading platforms and other crypto industry participants.
- Choose Clients Carefully and Plan Accordingly. Accounting firms should consider the risks of non-audit work for prospective crypto clients and implement systems to protect the firm against its own legal liability, including engagement contracts that prohibit crypto clients from publicizing the accounting firm’s non-audit work or doing so in misleading ways.
- Think Ahead About Future Audit Work. Accounting firms should consider whether performing non-audit work for prospective crypto clients will create independence issues that preclude future audit engagements.
- Monitor Clients’ Public Statements and Consider a Noisy Withdrawal. Accounting firms should exercise vigilance and monitor crypto client representations about the firm’s non-audit work and consider a noisy withdrawal in the face of misleading communications, which include the firm making clarifying public statements or informing the SEC of the client’s actions.
© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
The Public Company Accounting Oversight Board (PCAOB) put auditors on notice about audit work related to crypto assets in its Spotlight: Inspection Observations Related to Public Company Audits Involving Crypto Assets. Discussing PCAOB standards for auditors of public companies and brokers and dealers transacting in or holding crypto assets, the PCAOB advised: “Activities associated with crypto assets may involve heightened risks to investors, public companies, and broker-dealers, including (but not limited to) high levels of volatility, lack of transparency of parties engaging in transactions and the purpose of such transactions, market manipulation, fraud, theft, scams, and significant legal uncertainties.”