Hester Pierce strikes back against SEC crypto warning to accountants

July 29, 2023 Coin Telegraph

Hester Pierce, commissioner of the United States Securities and Exchange argued that full transparency should not come at the cost of compromising good-faith efforts.

Hester Pierce, commissioner of the United States Securities and Exchange (SEC), has raised concerns about the watchdog's recent statement advising accounting firms against taking on non-audit work for crypto clients.

In a July 28 tweet, Pierce questioned the recent statement made by the SEC's chief accountant, Paul Munter, warning accounting firms against engaging in assurance work for crypto platforms outside the scope of a full financial audit. She suggested that this approach to improve transparency might actually lead to hindering sincere efforts from crypto platforms.

“Why would we want to discourage good-faith efforts to provide more transparency?” Pierce stated.

Crypto platforms & their accountants should be clear about what proof of reserves is and isn't & customers should understand the limitations, but why would we want to discourage good-faith efforts to provide more transparency? https://t.co/fsuxUGPrrb
— Hester Peirce (@HesterPeirce) July 27, 2023

Munter stated that such practise might result in crypto firms selectively choosing only certain aspects of the business to show accounting firms and then presenting that information as a full audit to clients. He believes that work beyond a full audit's scope will lack transparency for investors.

"Non-audit arrangements are neither as rigorous nor as comprehensive as a financial statement audit, and may not provide any reasonable assurance to investors" Munter stated

According to Munter, if an accounting firm discovers that a client is making misleading statements about its non-audit work to the public, it should take a firm stance and treat it seriously. He noted:

“As best practise, the accounting firm should consider making a noisy withdrawal, disassociating itself from the client, including by way of its own public statements, or, if that is not sufficient, informing the Commission."

Mike Shaub, an auditing and accounting ethics professor at Texas A & M university, commented on the statement in a July 29 tweet, stating that auditors are bound by confidentiality, which makes it difficult to make public statements like Munter suggested.

The recent trend has been to take credit as being cutting edge (e.g., specializing in SPACs or crypto or whatever) to raise the profile, then to be low profile when things go south. That may have triggered SEC interest as well. If the auditor is silent in these cases, beware. 2/2
— Mike Shaub (@mikeshaub) July 28, 2023

Shaub also highlighted the issue of some accounting firms aligning themselves with cryptocurrency expertise to boost their reputation but become unresponsive when problems surface.

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Be ‘very wary’ of crypto proof-of-reserve audits: SEC official

December 23, 2022 Coin Telegraph

audit

SEC’s acting chief accountant Paul Munter said that investors shouldn't place too much confidence in a company holding up a proof-of-reserves audit.

A senior official from the United States Securities and Exchange Commission has warned investors to be “very wary” about relying on a crypto company’s “proof-of-reserves.”

“We’re warning investors to be very wary of some of the claims that are being made by crypto companies,” said SEC’s acting chief accountant Paul Munter in a Dec. 22 interview with The Wall Street Journal.

A number of crypto firms have commissioned “proof-of-reserves” audits since the collapse of crypto exchange FTX, aiming to quell concerns over their own exchange’s financial soundness.

However, Munter said the results of these audits isn’t necessarily an indicator that the company is in a good financial position.

“Investors should not place too much confidence in the mere fact a company says it’s got a proof-of-reserves from an audit firm.”

He further added that these proof-of-reserve reports “lack” the sufficient information for stakeholders to determine whether the company has enough assets to meet its liabilities.

Munter also recently spoke at the Association of International Certified Professional Accountants Conference in Washington, D.C on Dec.12, where he reportedly expressed frustration about the constantly evolving structure of crypto firms.

Munter noted to WSJ that if the SEC uncovers “troublesome” fact patterns, it may refer the matter to the division of enforcement for further review.

Earlier this month, John Reed Stark, former chief of the SEC of Internet Enforcement raised a “red flag” on Twitter over Binance’s proof-of-reserve report via Twitter on Dec. 11.

He said that Binance’s proof of reserve report didn’t address the effectiveness of internal financial controls, nor does it express an opinion or assurance conclusion nor does it vouch for the numbers.

It was revealed on Dec. 16 that French auditing firm Mazars Group, discontinued its section on its website dedicated to crypto audits.

The firm had worked with several prominent crypto exchanges including Binance, KuCoin and Crypto.com

Ben Sharon, co-founder of digital asset management firm Illumishare SRG previously told Cointelegraph on Nov. 19 that a proof-of-reserve audit is still a viable step to review the financial health of crypto exchanges, but it’s not enough by itself.

Investors have lost millions over the past twelve months with major crypto firms going bankrupt including Three Capital Arrows, Celsius and most recently cryptocurrency exchange FTX.

Paul Munter