6 December 2024

Taken from the published LinkedIn pulse article.

In September 2024, the Institute of Chartered Accountants in England and Wales (ICAEW) published a report titled ‘Considerations for Auditing Cryptocurrencies’. This report recognised the importance of expert knowledge in the financial audit of firms which utilise cryptocurrencies. Whilst the ICEAW states that the report is not intended as a “comprehensive guide” to auditing digital asset firms, it highlights several key technical risks auditors should consider when adhering to International Standards on Auditing when engaging digital asset firms. These were:

·      Understanding of the entity

·      Processes and controls

·      Onboarding

·      Valuation of assets

·      Ownership and control

·      Data accuracy (including on-chain).

One important aspect to note is that these areas present novel challenges to auditors, which usually go beyond financial audit firms' in-house expertise. Attempting to undertake such a specialist technical audit without employing independent blockchain experts can place the auditor at risk and potentially reduce the thoroughness and accuracy of the audit. Indeed, ensuring that the audits of firms operating in the blockchain industry involve sufficient technical understanding and analysis is not just a UK-specific concern. Regulators worldwide are looking carefully into high-profile cases of audits gone wrong and reconsidering the guidance offered to auditors.

For example, in September 2024, the Securities and Exchange Commission (SEC) announced that US-based audit firm Prager Metis CPAs had agreed to pay $1.95 million to resolve two actions alleging misconduct in its audits of the now defunct crypto trading platform FTX and auditor independence violations. To quote, “The SEC alleges that Prager failed to follow General Accepted Auditing Standards (GAAS) and its own policies and procedures by, among other deficiencies, not adequately assessing whether it had the competency and resources to undertake the audit of FTX. According to the complaint, this quality control failure led to Prager failing to comply with GAAS in multiple aspects of the audit.”

Cases like this have spooked the market, potentially causing already low interest from auditors servicing this sector to fall even further in the face of potential fines. In this context, the ICAEW’s report is a promising and important step toward bridging the potentially expanding engagement gap between auditors and the digital asset sector. While it is a common observation that a perceived gap is said to exist between digital assets and institutional finance, less attention is given to the comprehension gap with a myriad of essential professional service providers, such as lawyers, accountants, and tax specialists. As the digital asset space expands, fostering connections with these professionals will be increasingly crucial for mature, sustainable growth within the industry.

Indeed, until recently, digital asset companies faced major hurdles in obtaining financial audits due to a lack of supply. A substantial factor for this was, of course, the lack of established accounting guidelines for digital assets where traditionally relied-upon frameworks didn’t apply. This, combined with limited transparency and formal controls environments in many digital asset firms, and the underpinning technology's complexity, further discouraged auditors from the digital asset space.

However, some audit firms are beginning to develop tailored approaches to address the unique context of the digital assets space. In July 2024, specialist blockchain advisory firm Appold and accounting and auditing firm Gravita announced a strategic partnership to offer industry-leading audit services to firms operating in the blockchain and web3 space. The primary objective of the partnership was two-fold:

1.     Expand the availability of audit firms for companies holding or utilising crypto assets. The sector currently is characterised by limited participation from audit firms, thereby restricting companies' options.

2.     Undertake specialist audit services to ensure blockchain-based activities are audited with the highest security and transparency standards, providing an extra layer of assurance that standalone audit firms may lack.

Beyond offering an essential service to the ‘digital asset native’ industry, there is no doubt that more corporations will be holding digital assets in the future for a range of purposes, from treasury investment to utilising stablecoins to make cross-border transactions. In August 2020, NASDAQ-listed MicroStrategy Inc. made its first Bitcoin (BTC) purchase, buying approximately $250m of BTC. To date, they now have over $40bn of BTC assets in their treasury. In October 2024, a Microsoft Corporation filing with the SEC revealed an agenda item for their upcoming December, allowing a vote on whether cryptocurrency assets can be held in their treasury. At Appold, we are observing an increase in commodity, oil and gas firms using stablecoins (digital assets pegged to the US dollar) for faster and more cost-efficient cross-border transactions. This highlights how corporations are adapting to an increased adoption of cryptocurrencies.

All of these large firms require audits, putting pressure on auditors with little experience and knowledge to deal with these assets. It is encouraging that the ICAEW’s Digital Asset Working Party has appeared to have foresight into this, which will affect all accountancy and audit bodies worldwide.

The role of the auditor’s expert enables the separation of functions during an audit, allowing each specialist to focus on their key areas. The table below highlights the required functions of an audit and the different skills of each provider:

Partnering with an independent expert advisor in blockchain technology is a solution to the complexities posed by digital asset audits. Auditors can be assured that leading experts with a deep understanding of the latest developments in the niche area. This assurance gives auditors, who may otherwise feel unable to enter this market, the confidence to audit firms within the blockchain industry or those holding cryptocurrencies. This effect opens competition in the audit market and reduces the risks of regulatory fines.

Implementing the ICAEW’s guidance does not need to be intimidating or overly complex for auditors. For many, the most important aspect of this report is how to implement the measures outlined properly and in the spirit they were intended. This will mean working with an independent expert with the industry expertise and specialised knowledge to ensure clients receive a comprehensive audit with minimal disruptions to both the client and the auditor’s operations.

Reach out to us for further discussion.

 www.appold.com

For further information, please contact:

info@appold.com