• The Public Company Accounting Oversight Board’s (PCAOB) Office of the Investor Advocate recently issued an advisory for investors regarding the proof of reserve (PoR) reports by service providers to crypto entities such as exchanges and stablecoin issuers.
• PoR reports are not as reliable as audits and do not provide assurance regarding the effectiveness of internal controls or governance of the crypto entity.
• Popular crypto exchanges like Binance and Kraken published their PoR in the aftermath of the FTX scandal, in a bid to restore public confidence.
The PCAOB Advisory on Proof Of Reserve Reports
Reliability of Proof Of Reserve Reports
The Public Company Accounting Oversight Board (PCAOB) recently issued an advisory for investors about the reliability of proof-of-reserve (PoR) reports carried out by third parties for crypto entities such as exchanges and stablecoin issuers. According to the Office of the Investor Advocate, PoR reports have significant limitations in the procedures that are followed for verification, including not addressing cryptocurrency liabilities or rights/obligations held by digital asset holders nor whether assets have been borrowed by a crypto entity. Furthermore, these reports do not provide assurance regarding internal controls or governance structure within a crypto entity.
Discrepancy Among Service Providers
Another issue raised is that there is no uniformity among service providers catering to PoR needs of different crypto entities with some being performed by accounting firms while others done by non-accountant assurance providers. Additionally, management also has discretion on whether results from PoR reports are made public, including what extent and format this information is presented in.
FTX Incident
The collapse of Bahamas-based exchange FTX last November dealt significant damage to investors and other stakeholders within cryptocurrency markets. As a result, popular exchanges like Binance and Kraken published their own respective PoR in order to restore public confidence in cryptocurrency platforms.
Conclusion
In conclusion, PCAOB stated that these types of engagements “are not subject to PCAOB inspection” and “investors should note that PoR engagements are not audits” meaning they cannot be relied upon when making decisions with regards to investments within cryptocurrencies platforms.
The Public Company Accounting Oversight Board’s (PCAOB) Advisory on Proof Of Reserve Reports
Reliability:
The Public Company Accounting Oversight Board’s (PCAOB) Office of the Investor Advocate recently issued an advisory for investors regarding proof-of-reserve (PoR) reports which are typically carried out by third parties for crypto entities such as exchanges and stablecoin issuers. The PCAOB noted that these types of engagements have significant limitations in terms verifying procedures which include not addressing any potential liabilities held by digital asset holders nor whether assets have been borrowed by a crypto entity. Furthermore, these types engagements do not provide assurance regarding internal controls or governance structure within a given platform.
Discrepancy Among Service Providers:
.
Another issue noted was that there is no uniformity among service providers catering to different needs when it comes to conducting PoRs with some being performed by accounting firms while others done by non-accountants assurance providers. Additionally, management also has discretion on whether results from PoRs are made public including what extent and format this information is presented in.
FTX Incident:
.
The collapse of Bahamas-based exchange FTX last November dealt significant damage to investors and other stakeholders within cryptocurrency markets leading popular exchanges like Binance and Kraken publishing their own respective PoRs aimed at restoring public confidence.
Conclusion:
.
In conclusion, PCAOB stated that these types of engagements “are not subject inspections” from them; therefore “investors should note that PoRs are not audits” meaning they cannot be relied upon when making decisions with regards to investments within cryptocurrencies platforms..