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New-age firms fall due to old causes

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The US Public Company Accounting Oversight Board (PCAOB) was created courtesy of Enron and WorldCom. In India, thanks to Satyam and Sahara, the Companies Act 2013 was promulgated. The National Financial Reporting Authority (NFRA) was born thanks to the Punjab National Bank. What is clear from the above is that every time an accounting “accident” occurs, a new law is enacted.

Continuing that trend, the U.S. Securities and Exchange Commission (SEC) is reportedly watching closely the work done by auditors of crypto mining firms after the collapse of FTX. Questions have been raised as to whether audit firms have the necessary technical capabilities to audit such new-age companies. All of this has led at least one audit firm to abandon auditing cryptocurrency mining companies.

In India, the RBI has always treated cryptocurrencies with considerable skepticism. The Companies Act already has provisions for companies to disclose their cryptocurrency transactions.

The collapse of FTX triggered many of these reactions. But while FTX was a new-age company, its demise was sparked by age-old corporate governance failures. These include greedy promoters, diversion of funds to affiliates, donations to political representatives, and lack of internal controls over financial accounting and reporting. .

Financial statements of cryptocurrency companies only include a few new items. “Digital assets” are shown on the balance sheet, the main source of income is mining and hosting of digital currency, and the income and digital currency are revalued at the end of each month. The reporting period in which the profit or loss is reflected in the income statement.

A cryptocurrency mining company enters into a contract with a mining pool and has a performance obligation to provide computing power and transaction verification services to the mining pool in exchange for non-cash consideration in the form of digital currency. They measure the non-cash consideration received at the fair market value of the digital currency received. Fair value is estimated daily by multiplying the amount of digital currency received by the spot price on the date of receipt and is then measured as an intangible asset. Accounting standards worldwide require impairment testing of “intangible assets” at least annually.

Regulators are concerned that crypto mining companies do not have sufficient reserves to match their assets. This is a difficult request as most of these companies are funded by private equity funds, which are used to invest in expenses and equipment. Most of these companies are not profitable, so the classic accountant entry of transferring a portion of their profits to reserves each year is not possible. Instead of worrying about reserve evidence, regulators should get assurances about funding evidence.

You would have thought that FTX would hire the best auditors to audit complex transactions such as cryptocurrencies. However, they chose two small businesses that were given negative comments about their work by the PCAOB. In 2019, the PCAOB filed a private complaint that one of the company’s overall quality control processes related to the 2018 inspection was flawed because the company had not amended its board of directors within a year of his appointment. Your comment has been published. The company is also the auditor of Lottery.com and issued its 2021 Opinion. The lottery-selling start-up reported that he overestimated his available unlimited cash balance by $30 million and improperly recognized earnings. There was considerable doubt about its ability to continue as a Going Concern. The audit firm resigned from its audit role last September, just before a class action lawsuit was filed against Lottery.com executives.

FTX chose auditors who didn’t ask too many questions and followed their own policy. This suited the corporate auditor, who tended to violate his governance norms. It is futile to blame failing governance on inadequate accounting and auditing standards. The blame falls squarely on auditors who did not follow them at all. At best, auditing standards can be revised to strengthen internal controls over financial reporting.

All existing accounting and auditing standards apply to crypto companies. However, given the unique nature of their business, accounting regulators around the world will issue guidance on the accounting and auditing of such companies. It takes no time or effort to do so. Recent audit reports have enough space for auditors to tell verbatim. Corporate governance codes provide ample ammunition to keep companies on the right track. Nevertheless, if a company goes bankrupt, it may be due to him only two reasons. It is willful disregard for governance and disclosure norms, or sheer ignorance.

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