SEC Warns Accounting Firms Of Legal Peril In Crypto Audits

Key Points:

• SEC warns accounting firms of legal liability for crypto companies’ misleading partial reviews presented as “audits.”
• Mazars faces scrutiny and discontinues work with crypto clients over Binance’s contested financial review.
• Regulatory pressure mounts as SEC clamps down on transparency in the crypto industry.

In the aftermath of multiple scandals and insolvencies in the crypto industry, the Securities and Exchange Commission (SEC) has issued a stern warning to accounting firms.

The SEC’s Chief Accountant, Paul Munter, stated that these firms could be held legally accountable for the statements made by crypto companies regarding partial reviews of their finances, which are sometimes touted as “audits.”

The SEC’s concern primarily revolves around certain crypto asset trading platforms and other companies in the crypto industry that have marketed their retention of third parties, including accounting firms, to conduct reviews of specific aspects of their business, misleadingly presented as “audits.”

One prominent case that garnered public criticism involved accounting firm Mazars and its partial review of Binance’s books last year. Binance’s CEO, Changpeng Zhao, had claimed the review to be an audited proof of reserves. However, the report was subsequently pulled from Mazars’ website, raising further concerns about the transparency and accuracy of such reviews.

As a result of the controversies surrounding the crypto industry, Mazars made the decision to halt all work with clients in the crypto business, mirroring a growing trend among high-finance companies distancing themselves from the beleaguered sector.

Mazars had been hired by major crypto exchange Binance to perform a proof-of-reserves check on its Bitcoin holdings. While the firm initially found that the reserves were overcollateralized on a single day in late November 2022, they later removed the report from their website.

The SEC’s enforcement filings against Zhao, Binance, and Binance.US contained allegations that Binance.US did not have enough assets to cover customer redemptions, despite claims that it operated independently of Binance.

Munter further elaborated that accounting firms could face legal liability under antifraud laws if their clients mislead investors about the extent of a financial review or the scope of work done by the accounting firm. Moreover, anyone providing substantial assistance to another person in violation of the Securities Act or the Exchange Act may also be held liable.

In another development reported by Coincu, Grayscale Chief Legal Officer Craig Salm submitted a letter to the SEC regarding eight spot Bitcoin ETF filings, including their own. The letter argued that the SEC should make a fair and orderly decision, not picking “winners and losers” among ETF applicants. Grayscale suggested that the approval of spot ETFs could be based on the SEC’s previous approvals for Bitcoin futures ETFs, emphasizing that the two fund types are inextricably linked. The letter also raised concerns about surveillance-sharing agreements between Coinbase and spot ETF providers, claiming they would not meet the SEC’s standards.

As the crypto industry faces increased regulatory scrutiny, accounting firms and companies alike are being urged to maintain transparency and adhere to regulatory guidelines to protect investors and promote confidence in the market.

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