Threat or Alert? SEC Warns Accounting Firms: Fuzzy Audits Involving Crypto Companies May Be Illegal

The U.S. Securities and Exchange Commission (SEC) has expressed its views on the recent turmoil in the cryptocurrency industry, with several centralized exchanges (CEX) partnering with accounting firms to issue public reserve attestation reports. The SEC stated that the level of assurance provided by the audit report depends on the auditing practices of the accounting firm, and failure to disclose to investors could violate anti-fraud laws and securities trading laws.

SEC: Vague Descriptions by Accounting Firms Could Lead to Investor Deception

Given the series of scandals and bankruptcies in the cryptocurrency industry last year, matters related to cryptocurrency companies and trading platforms have been under discussion, especially the crucial aspect of "auditing" for legitimacy. This has put several accounting firms that have served cryptocurrency companies under scrutiny.

The SEC's Chief Accountant, Paul Munter, issued a warning to these accounting firms on Thursday through a public statement, stating that auditors may be legally responsible for misleading audit reports provided to clients, including the use of overly vague or precise language.

The audit reports they provide to clients may lead investors to believe that alternative "non-audit services" are equivalent in assurance to "financial statement audits," which is incorrect.

Paul Munter cautioned that "non-audit services" are not as rigorous and comprehensive as "financial statement audits" and may not provide investors with any reasonable assurance.

In December last year, accounting firm Mazars ceased providing services to cryptocurrency companies after facing criticism for its audit of the cryptocurrency exchange Binance. Previously, companies like Binance, KuCoin, and Crypto.com had all released reserve attestation reports through Mazars.

However, SEC Commissioner Hester Peirce raised questions about the motivation behind the statement, stating:

Accounting firms understand the distinctions, and clients should understand the limitations of audits. Why block well-intentioned efforts by cryptocurrency platforms and their accountants to provide more transparency?

Traditional Finance Does Not Allow Financial Firms to Consolidate All Business Operations

Additionally, SEC Chairman Gary Gensler, in an interview with Bloomberg TV yesterday, explained that the SEC has not yet made a decision to appeal the ruling in the current Ripple case. He claimed that even if the judge made a preliminary favorable ruling on XRP, the crypto market itself is still rife with fraud and evidently violates securities laws.

Bloomberg asset management analyst James Seyffart stated:

While Gensler really doesn't like cryptocurrencies, which is quite evident, traditional financial TradeFi basically does not allow market makers, exchanges, and custody of other businesses to be combined in the same company.