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The Securities and Exchange Commision (SEC) has called attention to a worrying trend involving accounting firms and their engagements with crypto asset trading platforms in the aftermath of previous scandals and financial failures within the crypto sector.
Certain exchanges for digital assets and other players in the blockchain industry have been touting fake "audits" of their operations to attract investors. The SEC cautions against such non-audit agreements because they do not give investors the same degree of certainty as a regular audit of financial statements.
The report underscores the risks associated with these misrepresented "assurance" services, which the Commission staff, PCAOB staff, and other experts in the field have already highlighted. The research is aimed squarely at accountants and, more specifically, those considering providing non-audit services to clients that deal in crypto assets.
🚨#SEC Chief Accountant Paul Munter warns of crypto "assurance" risks. Non-audit arrangements are not as rigorous as financial audits and may not provide full assurance to investors. Accounting firms, remember your obligations! https://t.co/X96Ej18GyB #InvestorSafety 📈🔒 pic.twitter.com/viPgn4w2Sa
— Sherwood Neiss - Investment Crowdfunding (@woodien) July 28, 2023
SEC’s message to accounting firms
Any severe misrepresentation of the scope or character of the services performed by an accounting firm might expose that business to legal responsibility. The antifraud provisions of federal securities statutes like the Securities Act of 1933 and the Securities Exchange Act of 1934 may apply to an accounting firm if a client falsely misrepresents the firm's non-audit activities. A "noisy withdrawal," in which the accounting firm publicly breaks ties with the client and maybe even notifies the SEC, is recommended in such situations.
Before accepting an audit engagement, accounting firms may provide limited non-audit advisory services to new market participants in the cryptocurrency business who will pursue a registered public offering. Before accepting an auditing assignment, however, accounting firms must determine whether or not their prior non-audit activities violate independence regulations.
When conducting audits subject to the independence requirements of the Commision, auditors must demonstrate both actual and apparent independence by Rule 2-01 of Regulation S-X. To verify whether an auditor is independent, the SEC looks at any connections between the auditor and the company being audited. The appearance of independence might be jeopardized if an audit company engages in advocacy or lobbying on its client's behalf throughout the audit engagement.
Under Rule 102(e) of the Commission's Rules of Practice, an accounting firm or its accountants may be censured or suspended from practicing before the SEC for violations of federal securities laws or independence standards. Acts of negligence or wilful or wanton disregard for professional norms, such as auditor independence requirements, fall under the umbrella of professional misconduct.
The SEC emphasizes that even a single incidence of wrongdoing may result in punishment and that any concerns about an accountant's independence require further investigation. The study stresses the importance of the role audit firms play in protecting investors by noting that illegal professional conduct not only affects individual accountants but also imposes responsibility on the whole audit business.
editor
A digital nomad exploring the limitless potential of decentralized finance in a centralized economy.