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Beware Crypto Billionaires Boasting of Audits

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“Where were the lawyers and accountants?” did.

Binance and Other Platforms Defend FTX Scandal by Appealing to Credibility as Watchdogs Crack Down on a Largely Offshore and Unregulated Crypto Industry Worth $3 Trillion at its Peak This is again an important issue as we are about to pull. According to his outside adviser, the WSJ, Wall Street’s top regulator has warned investors to be “vigilant” about how crypto firms facilitate the narrow range of work done by accounting firms. , the WSJ said it is considering enforcement action.

Auditors and lawyers are seen as important ‘gatekeepers’ by regulators responsible for fighting fraud and money laundering, but like others, a bewildering number of them are on bankrupt exchange FTX. Clearly missed the red flags of Former billionaire founder Sam Bankman-Fried said last year that FTX and its U.S. arm had been accused of “U.S. Passed GAAP audit,” he tweeted, showing off his clean health from auditors. customer funds.

There is no indication that Gatekeeper was involved in any wrongdoing. But FTX’s complete lack of internal controls, misleading communications about the insurance status of customer funds, a series of reported acquisitions “for regulatory purposes,” and the far from perfect separation between FTX US and The Bahamas. No alarm bells were rung, though. Most of the suspected scams were carried out – based company.

Armanino LLP, the auditor for FTX US, told the Financial Times that the requirements for private company audits do not include a review of internal controls and said it supported the work. However, there have been repeated warnings that the lack of oversight and limited accounting guidance for cryptocurrencies poses risks of material misrepresentation, fraud and money laundering. Weeks before FTX collapsed, EY broke up with her crypto mining company, Core Scientific, citing inadequate internal controls. It is now too late for accounting firms to label crypto clients as “high risk” or have stopped working in crypto.

Legal advice may be more nuanced and less formal than accounting, but it was only when FTX was in crisis that most of the legal and compliance team (apparently about 100 people) quit. Noteworthy. His legal counsel at FTX US, Ryne Miller, reportedly told staff via Slack: If the apparent freeze of top lawyers was the norm for FTX, that in itself would appear to be a red flag.According to the LA Times, Bankman-Fried has identified Miller’s contacts with former regulators. He wasn’t too shy about using it to chat with officials.

With Binance and others touting their own opaque external seal of approval for operations while trying to fill the gap left by FTX, it is urgent that these patterns are not repeated. Exchange boss Changpeng Zhao said earlier this month when her Mazars at the accounting firm produced Binance’s “Proof of Reserves” report (which is just a few lines showing a snapshot of Bitcoin assets). , took it up as something bigger. of reserves. transparency. Since then, Mazars has put all crypto work on hold.

Regulatory scrutiny can help, as can stricter standards. The SEC said this summer it needed to “take a hard look” at accountants and lawyers to make sure they met their responsibilities. Former SEC Commissioner Allison Herren Lee proposed earlier this year that minimum standards of professional conduct for attorneys, including red flag reporting requirements, should be developed and implemented. did. While she admitted that there is no silver bullet, she cited cryptocurrencies as an example of how her failure to follow “well-known principles” of securities law paid a price.

Enforcement measures also have a deterrent effect. The SEC last year sanctioned individual auditors and attorneys in connection with fraud cases not limited to public companies. The UK solicitor regulator is also on the path to imposing “unlimited fines” for certain economic crimes. Lily Fang, director of research at the business school INSEAD, said past scandals like the Wirecard collapse show the need to prevent standards from easing at a time when markets are optimistic.

For now, the focus is on Bankman-Fried and his entourage, with two former colleagues pleading guilty to fraud charges. But after years of speculative crypto euphoria and a still-piling bankruptcy landscape, the age-old question of where are the lawyers and accountants will once again be asked.

Details from Bloomberg Opinion:

• Musk takes Twitter down a dangerous rabbit hole: Parmy Olson

•Hungry for yield?Check out the money market fund: Alexis Leondis

• FTX crypto victim card hard to play: Lionel Laurent

This column does not necessarily reflect the opinions of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.

Other stories like this Bloomberg.com/opinion

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