"Reserve Proof Report" is not equivalent to an audit, the Accounting Supervision Committee reminds that assets are not guaranteed to be fully protected.

Is it reliable for exchanges or stablecoin issuers to engage accounting firms to conduct audit reports? Currently, regulatory authorities seem to hold a negative view on this.

The Public Company Accounting Oversight Board (PCAOB) issued a statement cautioning investors not to overly rely on Proof of Reserve (PoR) reports that fall outside of its regulatory oversight. Such reports do not guarantee that customer assets are adequately protected as of the report date or in the future.

PCAOB: Auditing Accounting Firms for Nonprofit Organizations

The Public Company Accounting Oversight Board (PCAOB) was established under the Sarbanes-Oxley Act as a nonprofit organization authorized to oversee audits of public companies and other issuers to protect the interests of investors. The Sarbanes-Oxley Act prohibits unregistered accounting firms from issuing audit reports for U.S. public companies or playing significant roles in the process.

Note: The Sarbanes-Oxley Act is a regulatory law enacted by the U.S. Congress in response to corporate and securities regulation issues exposed in financial fraud events such as Enron and WorldCom. The Act made significant revisions to the U.S. Securities Act of 1933 and the Securities Exchange Act of 1934, introducing many new provisions in corporate governance, accounting professional oversight, and securities market regulation.

Reserve Proof Reporting Business is Not an Audit

In a recent report, the PCAOB noted that they have observed some service providers, including auditing firms registered with the PCAOB, issuing reserve proof reports to certain cryptocurrency institutions such as cryptocurrency exchanges and stablecoin issuers. These cryptocurrency institutions aim to reassure clients and address various concerns, such as the types of reserves held, the security and availability of clients' digital assets, and the ability to respond to related emergency situations.

Investors should note that reserve proof reports are not audits, and therefore, such reports do not provide any meaningful assurance to investors or the public.

Generally, the purpose of these reserve proof reports is to provide asset verification for specific asset types at a particular moment, but there are significant limitations due to their execution procedures. For example, the procedures taken may not reflect the liabilities of the cryptocurrency institution, the rights and obligations of digital asset holders, or whether the cryptocurrency entity is merely borrowing assets at the moment to appear to have sufficient collateral or excess reserves. Furthermore, reserve proof reports do not guarantee the effectiveness of internal controls or the governance of cryptocurrency institutions.

Additionally, service providers conducting reserve proof reports lack uniformity. For example, some reserve proof reporting businesses are carried out by accounting firms, while others are conducted by non-accounting assurance providers. The management of cryptocurrency institutions can also decide whether to disclose the results of reserve proof reports, including the scope and format of the data provided.

Reserve proof reporting businesses, whether providing reasonable assurance, limited assurance, or no assurance agreed-upon procedures, are not bound by PCAOB auditing standards and are not subject to PCAOB inspections.

Agreed-upon procedures are procedures determined by the management of cryptocurrency institutions that a third party must perform in conducting business. In this case, reserve proof reports only provide factual investigation results of the procedures performed and do not express an opinion on the sufficiency of the procedures. These types of reserve proof reports do not provide opinions on the adequacy of reserves, the financial stability of cryptocurrency institutions, or the effectiveness of management statements.

Similarly, reserve proof reporting businesses providing limited or reasonable assurance are not bound by uniform standards. Therefore, depending on the standards chosen by management and the reserve proof reporting service provider, the execution of agreed-upon procedures may yield different results.