Warren, Wyden to Accounting Regulator PCAOB: You Must Act to Address Concerns Raised by Crypto Firms’ Sham Audits
FTX Auditors Failed to Identify Widespread Malfeasance Before Crypto Platform Crashed
Failed crypto audits “undermine confidence in the PCAOB-registered auditors that investors and the public rely on when making investment decisions”
Washington, D.C. – U.S. Senators Elizabeth Warren (D-Mass.), a member of the Senate Finance and Banking Committees, and Ron Wyden (D-Ore.), Chair of the Senate Finance Committee, sent a letter to the Public Company Accounting Oversight Board (PCAOB), raising concerns about crypto accounting firms’ independence and methodology following reports of whitewashed audits of crypto firms with histories of malfeasance. The senators are calling on the PCAOB to ensure auditor accountability and the credibility of the auditing system.
The PCAOB’s mission is to regulate the audits of public companies and SEC-registered brokers and dealers in order to protect investors and the public.
“When PCAOB-registered auditors perform sham audits – even for firms that may lay outside of the PCAOB’s jurisdiction – they tarnish the credibility of the PCAOB and undermine confidence in the PCAOB-registered auditors that investors and the public rely on when making investment decisions,” wrote the senators.
In July 2021, Sam Bankman-Fried boasted that FTX had become “the first (?) crypto derivatives exchange to complete a [generally accepted accounting principles] GAAP audit” and he announced in August 2021 that FTX’s U.S. affiliate also “passed its US GAAP audit.” As questions about FTX’s solvency began to swirl in November 2022, Bankman-Fried cited its “GAAP” audits in an effort to quell concerns. These audits conducted by Armanino and Prager Metris failed to identify the alleged “old-fashioned embezzlement,” “unprecedented” lack of recordkeeping, and “utter failure of corporate controls” at the heart of FTX’s collapse.
Multiple auditing firms have worked with shady crypto companies. Deloitte and PricewaterhouseCoopers reportedly advised FTX before its collapse, and Mazars Group and Marcum veiled so-called “proof-of-reserve” reports, which are intended to show that a crypto company providing custody services has assets that are equal to or greater than customer deposits. Some crypto firms like Kraken, Yield App, and Binance have touted these proof-of-reserve reports as “audits” and evidence that they have the funds necessary to meet depositor claims.
The senators note that if the auditors who scrutinize large public companies are the same ones who whitewash “audit” results for crypto firms with demonstrated histories of malfeasance, investors and the public will not have confidence in any of these audits. They also noted that PCAOB Rules 3100 and 3200 appear to bar board-registered auditors from conducting the sham audits that gave investors undue confidence in shady crypto firms.
Given concerns about crypto auditing firms and the integrity of the auditing system, Senators Warren and Wyden are asking PCAOB to answer a comprehensive set of questions about how it will protect investors and consumers from deceptive auditing practices by February 8, 2023.
Senator Warren has been an outspoken advocate for regulation and oversight of crypto to protect consumers, the environment, the energy grid, national security, and the safety and stability of the financial system. Since the collapse of FTX, she has worked to hold all responsible parties accountable:
- On December 8, 2022, Senators Warren and Tina Smith (D-Minn.) sent letters to three key banking regulators: the Federal Reserve (Fed), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), raising concerns about the ties between the banking industry and crypto firms following FTX’s bankruptcy. The senators are asking each regulator how they assess the banking system’s exposure to crypto risks.
- On December 5, 2022, Senators Warren, Roger Marshall (R-Kan.), and John Kennedy (R-La.) sent a letter to Silvergate, the bank that reportedly facilitated the transfer of FTX customer funds to Alameda Research, seeking answers about the bank’s role in the loss of billions of dollars in customer funds.
- On November 30, 2022, at a hearing of the Senate Banking, Housing, and Urban Affairs Committee, Senator Warren called on regulators to keep crypto out of the banking system following FTX’s collapse.
- On November 23, 2022, Senators Warren and Sheldon Whitehouse (D-R.I.) sent a letter to the Department of Justice requesting personal accountability for former FTX CEO Sam-Bankman Fried and any complicit FTX executives for wrongdoing following the exchange’s collapse.
- On November 22, 2022, Senator Warren published an op-ed in the Wall Street Journal urging federal regulators to use their expansive authorities to crack down on crypto fraud and hold the industry to the same basic standards as other financial activities.
- On November 17, 2022, Senators Warren and Dick Durbin (D-Ill.) sent a letter to Sam Bankman-Fried, founder and former CEO FTX, and John Jay Ray III, the newly appointed CEO of FTX, seeking information on the reported misuse of billions of dollars of customer funds and other disturbing allegations that continue to emerge about the company’s fraudulent and illicit practices.
- On October 25, 2022, Senators Warren and Whitehouse and Representatives Alexandria Ocasio-Cortez (D-N.Y.), Jesús “Chuy” García (D-Ill.), and Rashida Tlaib (D-Mich.) sent a letter to the U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission, the U.S. Department of Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau, seeking information about the steps each regulator is taking to stop the revolving door between financial regulatory agencies and the cryptocurrency industry.
- In September 2022, Senator Warren sent a letter to Treasury Secretary Janet Yellen calling on the Treasury Department and the Financial Stability Oversight Council to build a strong regulatory framework for the crypto market. The letter specifically warned about FTX’s market concentration as an example of the risks that crypto could pose to consumers and the financial system.
- In July 2022, Senator Warren and her colleagues released the findings from an investigation into seven large cryptomining companies – showing extraordinarily high energy use and climate impacts from cryptomining – and called on the EPA and DOE to take action.
- In May 2022, Senators Warren and Smith sent a letter to Fidelity, asking the company to explain its decision to allow Bitcoin investments for 401(k) plans, despite the Department of Labor’s warnings about 401(k) crypto investments.
- In March 2022, Senator Warren, Senate Armed Services Committee Chair Jack Reed (D-R.I.), Senate Intelligence Committee Chair Mark Warner (D-Va.), and Senate Defense Appropriations Subcommittee Chair Jon Tester (D-Mt.) introduced the Digital Asset Sanctions Compliance Enhancement Act to ensure that Vladimir Putin and Russian elites don't use digital assets to undermine the international community’s economic sanctions against Russia following its invasion of Ukraine.
- In March 2022, at a hearing of the Senate Banking, Housing, and Urban Affairs Committee, Senator Warren highlighted the various crypto tools that could make it easier for sanctioned individuals to hide their wealth and lessen the impact of Russian sanctions.
- In March 2022, at a hearing of the Senate Banking, Housing, and Urban Affairs Committee, Senator Warren warned that crypto may allow Russia to dodge sanctions and urged stronger regulation of the crypto market to ensure that countries, drug traffickers, cyber criminals, and tax cheats can’t evade economic pain.
- In March 2022, Senators Warren, Warner, Reed, and Sherrod Brown (D-Ohio), Chair of the Senate Banking, Housing, and Urban Affairs Committee, sent a letter to Treasury Secretary Janet Yellen, asking about the Treasury Department’s plans to enforce sanctions-compliance guidance for the cryptocurrency industry to ensure that economic sanctions remain an effective tool for achieving foreign policy goals.
- In December 2021, during a hearing of the Senate Banking, Housing, and Urban Affairs Committee, Senator Warren raised concerns over the growing risks presented by stablecoins.
- In September 2021, at a hearing of the Senate Banking, Housing, and Urban Affairs Committee, Senator Warren called on regulators to step up to address crypto's regulatory gaps and ensure an inclusive financial system.
- In July 2021, Senator Warren sent a letter to SEC Chair Gary Gensler requesting information about the agency's authority to regulate cryptocurrency exchanges and protect consumers from risks posed by the highly volatile cryptocurrency market.
- In June 2021, chairing a hearing of the Senate Banking, Housing, and Urban Affairs Committee's Subcommittee on Economic Policy, Senator Warren delivered remarks on the opportunities and risks that digital currencies present.
- In a June 2021 interview, Senator Warren called the market for crypto the “wild west,” and said digital currency is “not a good way to buy and sell things and not a good investment and an environmental disaster.”
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