Crypto Attestation Updates and Trends
By Dr. Sean Stein Smith, CPA, DBA, CMA, CGMA, CFE, City University of New York – Lehman College –
January 17, 2024
As the FTX trial got underway in October 2023, with all of the headlines and stories that it pushed to the front page, one question also returned to the conversation: How exactly did this happen? And because FTX had audit engagements with two firms — Armanino and Prager Metis — as well as employed two of the Big 4 to perform various accounting and tax services, the question becomes even more pointed.
The fallout for both audit firms has been severe, with Armanino having exited the blockchain audit business altogether and Prager Metis currently being sued by the Securities and Exchange Commission (SEC) due to involvement with the FTX audit. In addition, the Office of the Chief Accountant at the SEC issued what has been construed by some practitioners as a warning against offering audit and attest services to crypto firms.
Coupled with the decline in market prices for cryptoassets at large, including recent opinions that 95% of the non-fungible token (NFT) market is worthless, the outlook for crypto attestation might seem bleak. On the other hand, there are multiple stories and trends that offer a more optimistic outlook, both for the space at large and for more consistent and applicable auditing standards. Several of the largest financial institutions in the world, including Blackrock, JP Morgan and Citi, have all recently filed for certain crypto products to be approved, expanded existing blockchain and tokenization offerings, or launched tokenized payment options for clients. In addition to these developments, there has been beneficial news on the accounting front as well with the Financial Accounting Standards Board (FASB) preparing to pass the first crypto-specific accounting codification by the end of 2023.
With all of that in the marketplace, there are two specific things that practitioners seeking to provide audit and attestation services to clients in the crypto space, now or in the future, need to keep in mind as the conversation continues to progress.
Stablecoins Will Drive Attestation Improvement
As noted above, there are multiple large financial institutions investing heavily in developing and launching blockchain and cryptoassets, so this clearly means that the market expectation will be for more transparent and real-time accounting data. This is not to mention the developments at PayPal, namely the creation and issuance of a stablecoin (PYUSD) that is available to more than 400 million customers worldwide. A stablecoin issued and backed by a payment processor that has household name recognition is almost guaranteed to increase the ubiquity of stablecoin transactions in the marketplace.
Additionally, stablecoin transaction volume exceeded that of Mastercard and PayPal in 2022, which also is a clear sign that crypto transactions are here to stay. Lastly, with the Gen Z cohort expressing substantial interest in receiving at least a portion of salary in crypto, the volume of crypto transactions (even if Bitcoin remains relatively subdued) looks set to continuously increase over the coming years.
With this increase in transactions, the need and expectation for real-time and accurate attestation will also grow; practitioners are well situated to take advantage of these trends.
Controls Will Play a Large Role in Attestation
Although the distinction between audits and attestation engagements are important to keep in mind, internal controls and the control environment are crucial to all work related to establishing the accuracy of accounting data. As cryptoasset transactions continue to increase in both volume and number of potential users, here are a few things that practitioners should keep in mind:
- Wallet management: Hot wallets and cold wallets might seem like rudimentary areas to focus on for experienced users, but with new users, these are topics worth revisiting both in terms of client education as well as cybersecurity considerations.
- Multi-signature access: One control that can help prevent misappropriation of assets is a multi-sig wallet, requiring multiple individuals within a firm to mutually authorize large crypto payments.
- Exchange to payment mapping: One common pain point in the crypto accounting space is the mapping of exchange balances and transactions into existing accounting ERP systems. This is often where errors, mislabeling and the potential for theft are highest.
Practitioners would be well advised to keep all of these factors in mind when either educating themselves about crypto attestation or seeking to engage with clients on these issues.
| Sean D. Stein SmithDr. Sean Stein Smith, CPA, DBA, CMA, CGMA, CFE, is a professor at the City University of New York – Lehman College. He is a member of the NJCPA Board of Trustees, a New Jersey CPA Political Action Committee Trustee and participates on several interest groups. More content by Sean D. Stein Smith: Learn more from Sean D. Stein Smith: |
This article appeared in the winter 2023/24 issue of New Jersey CPA magazine. Read the full issue.