The auditor of the bankrupt US stock exchange business FTX said it stands by its work for Sam Bankman-Fried and is proud to provide services to the cryptocurrency industry that needs to improve trust and transparency, but will relinquish its digital asset practice by the end of next month.
In the first interview given by one of the leaders of accounting firm Armanino since the collapse of FTX last month, chief operating officer Chris Carlberg said “market conditions” have changed and it will stop offering financial statement audits and so-called Proof of Reserves reports to the crypto industry.
California-based Armanino delivered a clean bill of health to the 2020 and 2021 financials of FTX US, an offshoot of the Bankman-Fried cryptocurrency empire that offered trading to US residents. FTX US collapsed into bankruptcy with FTX’s largest international exchange last month.
Carlberg said Armanino “had no client relationship” with Alameda Research, Bankman-Fred’s crypto hedge fund, or FTX’s largest international exchange, where the former billionaire allegedly defrauded clients of billions of dollars.
“We certainly support the work of FTX US,” Carlberg said. Some voices in the industry said we should have done a better job on an internal controls audit, but we were never involved in an internal controls audit. This happens with public companies. It is not required by the standards of US private company audits.”
FTX court filings described a sprawling group of companies where accounting was often chaotic and internal controls were deficient to non-existent. John Ray III, an expert brought in to run companies through bankruptcy, said past financial statements should not be relied upon.
Industry standards only require that auditors of a private company understand the company’s internal controls and plan their audit work accordingly. “The team engaged in the analysis required by the standards relevant to this topic, and again, we feel very good about the work we have done in this area,” said Carlberg.
Armanino and FTX’s international operations auditor, Prager Metis, are facing a lawsuit from FTX clients alleging they were “reckless or willfully blind.” Carlberg declined to comment on the lawsuit.
Armanino is one of the 20 largest accounting firms in the United States, with about $500 million in revenue last year, according to Accounting Today, and more than 200 partners. It has also become a leading provider of Proof of Reserve Reports to crypto projects, a controversial product intended to prove the safety of client funds but which falls short of a full audit of financial statements of the kind Armanino provided to FTX US.
Regulators have questioned the value of the product, which offers only a limited glimpse into the crypto project’s true financial health. Mazars, another accounting firm, said last week that it would stop filing such reports, and pulled the work it had done for cryptocurrency exchange Binance from its website.
The Armanino team of nine providing evidence of reserves reporting will leave the company and create a new entity to take over existing customers, with the separation scheduled to be completed by the end of next month.
“Any professional services company needs to adapt and re-evaluate given the dramatic changes that have occurred in the cryptocurrency market in the past two months,” Carlberg said.
The practice of digital assets accounts for less than 1 percent of the company’s revenue, but it has attracted unwanted attention since the collapse of FTX, including through the emergence of messages from its Twitter account encouraging Bankman-Fried’s appearance before the US Congress.
“Our partners and our company are very proud of the work we’ve done in this area,” said Carlberg. “There is a need for more trust and transparency.”
But he echoed Mazar’s warning of the danger of Proof of Reserve Certificates being misunderstood by investors. “There is still a very large gap in understanding what an audit or Proof of Reserve offer provides to the recipients of those reports. We hope that this gap of understanding will change over time, but it is a very large gap today.”
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