After Bank Failures, Warren, Wyden Renew Call for Accounting Regulator PCAOB to Stop Sham Audits of Crypto Firms
“(W)e continue to be disappointed by your unwillingness to use PCAOB’s existing authority to rein in these abusive practices by registered auditors… PCAOB has the authority to act… to protect the integrity of the auditing system”
Senators Asked PCAOB to Act in January 2023; Now Stress Urgency After Silvergate, SVB, and Signature Bank Crashes
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), calling on the regulator to take action to stop sham audits of crypto firms. The senators’ letter comes after their January 2023 letter to PCAOB, seeking answers from the regulator about its intention to rein in sham audits of crypto firms. Responses from PCAOB confirmed that it is aware of these threats, but has not done enough to address these risks in wake of numerous bank failures, including Silvergate Bank, Silicon Valley Bank, and Signature Bank.
“Auditors’ sham reviews of crypto firms cast distrust and disrepute upon the entire auditing system: no credible auditor of public companies should be providing sham audits of crypto or other non-public firms. You have ample authority to establish standards for auditors that require any SEC-registered auditor to only conduct audits of crypto firms that comply with existing standards for audit quality,” wrote the senators. “It is critical that PCAOB use its existing authority to ensure that sham crypto audits do not become an even bigger threat to investors, the public interest, and the integrity of the accounting system for SEC-registered issuers, brokers, and dealers.”
The senators expressed approval for PCAOB’s important acknowledgments of the risk from crypto, including PCAOB Chair Erica Williams confirming the regulator is aware of threats posed by sham crypto audits, writing, “I share your concern that when PCAOB-registered auditors perform ‘sham audits’ – even for entities whose audits generally fall outside of our jurisdiction – there are risks to investors and the PCAOB,” and that “use of digital assets presents unique audit risks to companies and requires an appropriate risks assessment and audit response by audit firms.” PCAOB’s Office of the Investor Advocate warned on March 8, 2023, about proof of reserve reports for crypto firms, writing that: “The Office of the Investor Advocate is aware of some service providers, including PCAOB-registered audit firms, issuing proof of reserve reports (‘PoR Report’”) to certain crypto entities … Proof of reserve reports are inherently limited, and customers should exercise extreme caution when relying on them to conclude that there are sufficient assets to meet customer liabilities.”
However, the senators expressed their disappointment that PCAOB is unwilling to use its existing authority to rein in abusive practices in crypto audits by PCAOB-registered auditors, particularly in the wake of bank failures – some related to a heavy reliance on crypto firm depositors – at Silvgergate Bank, Silicon Valley Bank, and Signature Bank. “A plain reading of the text of the Sarbanes-Oxley Act, which created the PCAOB and established its authority, clearly states that PCAOB has the authority to act on its broad responsibility to protect the integrity of the auditing system for SEC registered brokers, dealers, and issuers. And given that the ongoing use of sham audits of crypto firms conducted by PCAOB-registered auditors mislead the public and threatens the integrity of that auditing system – and we now know, potentially the banking and financial systems – you have both the authority and responsibility to rein them in,” wrote the senators.
Senators Warren and Wyden are calling on PCAOB to immediately use its authority to rein in sham audits of crypto firms, provide answers to a set of questions about audits of crypto firms and proof-of-reserve reports by April 4, 2023, and provide the senators with a staff-level briefing by March 31, 2023.
- On January 26, 2023, Senator Warren and Wyden sent a letter to PCAOB, raising concerns about crypto accounting firms’ independence and methodology following reports of whitewashed audits of crypto firms with histories of malfeasance.
- 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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