FTX collapse puts its auditors in the spotlight

FTX collapse puts its auditors in the spotlight

The collapse of FTX has thrown the spotlight on two US accounting firms that the cryptocurrency exchange said it had used to audit its books.

FTX claimed its 2021 financial results had been audited by Armanino, one of the top 20 accounting firms in the country by revenue, and Prager Metis, which is shaping up to be the first accounting practice to open a headquarters in the metaverse.

The two firms are among several in the US that have touted expertise in digital assets in a race to win business from the growing number of crypto firms, even though accounting rules for digital assets are often unclear and companies are still in their infancy.

FTX founder Sam Bankman-Fried last year hailed the review of its financial results as a milestone, but the accounts were not made public and the names of the auditors did not emerge until before its collapse on Friday.

Forbes magazine said FTX provided it with “a wealth of information about its operations, including most of the companies it did business with, when its most recent audits were and details of its regulatory licenses” earlier this year when the publication prepared a ranking of cryptocurrency exchanges. (FTX was ultimately ranked fifth.)

“Notably among FTX’s advisors and business partners were the New Jersey office of auditor Prager Metis CPAs, LLC and San Ramon, CA’s Armanino, LLP, which performed audits of FTX and FTX.US for the 2021 fiscal year,” the paper revealed Thursday .

Neither accounting firm responded to messages seeking comment on the scope of their work for FTX, or when they last issued an audit opinion.

FTX was hit by a run on client deposits on its international exchange, which followed revelations about the complicated relationships between the exchange and other entities in Bankman-Fried’s crypto empire. His trading firm Alameda Research this week owed FTX $10 billion, according to people familiar with its finances.

Bankman-Fried blamed misreporting of the stock market’s liquidity and leverage for the collapse.

FTX’s claims to have audited finances left many questions unanswered, said Jeffrey Johanns, a former PwC partner who teaches auditing at the University of Texas at Austin, especially in light of revelations about the complexity of its organizational structure.

“If there was any type of assurance from an accounting firm, what type of assurance was it, how extensive was it and how many entities were covered?” Johannes said. “Especially if there are transactions between companies, it would be difficult to audit.”

Prager Metis, which has more than 100 partners and 600 employees in 24 offices worldwide, says its clients include private and public companies in industries ranging from hospitality to manufacturing.

An August report by the Public Company Accounting Oversight Board, the watchdog of the U.S. accounting profession, said its inspectors found deficiencies in all four of the public company audits conducted by Prager Metis that they looked at. The company told the PCAOB that it was working to fix the problems.

The group has a digital assets practice that it says provides services to crypto exchanges, issuers of non-fungible tokens and crypto hedge funds, among others. It has also sought to advise companies setting up operations in the immersive virtual worlds known as the metaverse.

“There is a huge need for financial expertise and resources in the evolving digital world,” CEO Glenn Friedman said in January, when Prager Metis opened a “headquarters” on the metaverse platform Decentraland. The company is sponsoring an event at a music festival on the platform this weekend.

In a now-deleted web post in June, which showed Prager Metis and FTX staff at a Yankees baseball game, the company said it was “proud to support FTX US” and “looks forward to our next adventure together.”

Armanino has also pushed hard into work for digital asset and cryptocurrency companies, helping it become one of the fastest-growing U.S. accounting firms, with $458 million in revenue in its most recent fiscal year, according to Accounting Today.

The company has heavily marketed technology that enables cryptocurrency exchanges and other companies to demonstrate that digital assets are secure, with real-time verification for customers. An Armanino Twitter account promoted the product on Tuesday as the dissolution of FTX gripped the industry.

Last December, the same account had tweeted approval in response to Bankman-Fried’s testimony before the House Financial Services Committee, when the FTX founder pushed lawmakers to standardize crypto regulation and promote innovation.

“Working on all of our behalf today,” the account wrote.

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