The Securities and Exchange Commission's chief accountant, Paul Munter, warned accounting firms could be legally liable for “material” misstatements made by clients in the crypto-asset sector that mischaracterize less rigorous reviews of their companies as audits, according to a written statement Thursday.
Munter called out crypto asset trading platforms in particular, noting some companies have hired “third parties, sometimes accounting firms,” to conduct reviews of parts of their businesses and then presented them as a “purported ‘audit,’” he wrote.
“As accounting firms increasingly engage in this sort of non-audit work, their clients’ marketing and terminology risks misleadingly suggesting that these alternative, non-audit arrangements are at parity with, or even more ‘precise’ than, a financial statement audit. Such suggestions are false,” he wrote, adding that non-audit service work is not as rigorous as a financial statement audit.
Munter has highlighted the consequences of accounting lapses before. In November he spoke about signs of decline in the level of “professionalism” among employees at some of the largest accounting firms. At the time, Munter did not identify any firms by name, but earlier last year the SEC fined Ernst & Young $100 million for cheating by its auditors on ethics exams and for withholding evidence of wrongdoing from the agency’s Enforcement Division.
His latest comments come as the blockbuster implosion of crypto exchange FTX, along with the collapse of other companies in the sector, have led to expectations of sharper scrutiny of the accounting industry and its standards this year, CFO Dive previously reported. But while some regulatory and legislative issues have been moving forward, it’s not clear yet exactly how aggressive the changes will be.
Last month two Republican lawmakers released a draft piece of legislation, which constituted the most significant federal legislative development in the crypto sphere to date, Industry Dive sister publication Banking Dive reported. It outlined a regulatory plan for digital assets, divvying up authority over crypto between the Commodity Futures Trading Commission and the SEC.
In addition, the Financial Accounting Standards Board is also moving along on its long-awaited initiative that would make fair value the primary method of accounting for certain crypto assets. Crypto companies as well as financial report preparers have been critical of the current practice, which generally treats cryptocurrency as an intangible asset and have advocated for the change. Current guidance has generally been interpreted to mean that crypto assets should be impaired to the lowest observable value within a reporting period.