SEC warns against ‘fake audits’ in crypto

The Securities and Exchange Commission (SEC) has warned about a worrying trend in which accounting firms are collaborating with cryptocurrency trading platforms with a track record of scandals and financial collapses within the cryptocurrency sector.

Notably, the commission notes that certain players in the blockchain industry are promoting fake “audits” to attract investors. The SEC has warned against such non-audit agreements as they do not provide the same level of assurance as a proper audit of financial statements to investors.

The report underscores the risks associated with these misrepresented “assurance” services, which the commission’s staff, PCAOB, and other experts in the field have already highlighted. 

The research focuses on accountants contemplating offering non-audit services to clients dealing with crypto assets.

SEC’s message on accounting firms

The SEC said misrepresenting an accounting firm’s services could result in legal liability. 

If a client makes false misrepresentations about a firm’s non-audit activities, it would be a violation of antifraud provisions under federal securities statutes. In such cases, a “noisy withdrawal” may be recommended as a solution, where the accounting firm publicly terminates its association with the client and informs the SEC.

Before accepting an audit engagement, accounting firms may provide limited non-audit advisory services to new market participants in the cryptocurrency business who will pursue a registered public offering. 

However, accounting firms need to determine whether their prior non-audit activities violate independence regulations before accepting an auditing assignment. 

Auditors must demonstrate both actual and apparent independence when conducting audits subject to the independence requirements of the commission. 

The appearance of independence might be jeopardized if an audit company engages in advocacy or lobbying on its client’s behalf throughout the audit engagement. Violating federal securities laws or independence standards could result in an accounting firm or its accountants being censured or suspended from practicing before the SEC. 

Professional misconduct, such as wilful or wanton disregard for professional norms, could also lead to punishment. 

The SEC emphasizes the importance of audit firms’ role in protecting investors and notes that illegal professional conduct affects individual accountants and imposes responsibility on the whole audit business.