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Senate Democrats Push for PCAOB Inspection of Audits of Crypto Firms Acting as Broker-Dealers

Bill Flook  Editor, Accounting and Compliance Alert

· 5 minute read

Bill Flook  Editor, Accounting and Compliance Alert

· 5 minute read

Two Senate Democrats on Jan. 25, 2023, pressed PCAOB Chair Erica Williams on whether the board will inspect auditors of crypto firms that act as broker-dealers, even if those firms are not registered with the SEC.

The letter from Senators Elizabeth Warren of Massachusetts and Ron Wyden of Oregon comes months after SEC Chair Gary Gensler urged crypto intermediaries performing broker-dealer and other functions to register with the commission.

The two wrote to the PCAOB amid chaos in the crypto industry touched off by the collapse of the FTX exchange in November 2022. The FTX implosion, which has so far resulted in civil and criminal fraud charges against former CEO Sam Bankman-Fried and two others, has drawn harsh scrutiny on crypto firm auditing broadly and two FTX auditors in particular: Prager Metis CPAs and Armanino LLP. Neither firm responded to a request for comment

The two Democratic lawmakers, in their letter, pressed Williams on a series of auditing matters related to the FTX collapse, including on past inspection reports for the two audit firms; whether the firms complied with PCAOB requirements around auditing and related professional practice standards; and whether the PCAOB can strip auditors of their PCAOB-registered status “if they provide services or engage in conduct that fall short of PCAOB standards and rules, even if those actions are taken in relation to private, non-SEC registered companies?” (See PCAOB’s Latest Round of Audit Firm Inspection Reports Include Armanino in the Dec. 23, 2022, edition of Accounting & Compliance Alert.)

Williams has publicly noted that FTX was not a public company, and the PCAOB did not have jurisdiction over its audits. (See Chair Williams Explains PCAOB Has No Authority to Inspect Audits of FTX in the Nov. 30, 2022, edition of ACA.)

Among other questions, Wyden and Warren also questioned Williams on whether she would “commit to using your inspection authority to evaluate and publicly report on auditors that provided services for any crypto company acting as a broker dealer, even if the firm was not registered as such with the SEC?”

“If the auditors scrutinizing large public companies are the same auditors whitewashing ‘audit’ results for crypto firms with demonstrated histories of malfeasance, investors and the public cannot have confidence in either set of audits,” Wyden and Warren wrote. “These misleading financial reports shake our confidence in the entire auditing industry. Moreover, some of these crypto firms arguably should fall within the PCAOB’s jurisdiction given the SEC’s position that companies performing broker-dealer functions in the crypto market should be registered as broker dealers. Regardless, the PCAOB must act to maintain its rigorous standards for audit firms.”

A PCAOB spokesperson in a statement said “PCAOB received the letter and will respond directly to the lawmakers. We look forward to working with them on our shared goal of protecting investors.”

The two senators suggested Williams’ statements around its lack of jurisdiction over FTX’s auditors runs counter to PCAOB Rule 3100, which stipulates that “a registered public accounting firm and its associated persons shall comply with all applicable auditing and related professional practice standards,” and Rule 3200, which requires that “in connection with the preparation or issuance of any audit report, a registered public accounting firm and its associated persons shall comply with all applicable auditing standards adopted by the Board” and approved by the SEC.

“This rule is clearly not restricted solely to public companies,” they wrote.

Former PCAOB member Dan Goelzer pushed back against that argument, in an interview saying that “the audits they are concerned about are outside the PCAOB’s jurisdiction.”

“I think the Sarbanes-Oxley Act is pretty clear that the board’s jurisdiction is limited to audits of public companies and broker-dealers that file reports with the SEC,” he said.

On Rule 3200, he noted that “what they miss is that the word ‘audit report’ is a defined term in both the board’s rules and the Sarbanes-Oxley Act, and it’s defined to mean a report on the financial statements of a public company.”

Goelzer added that if Warren and Wyden feel the PCAOB should have that jurisdiction, “then Congress should amend the underlying laws, the Sarbanes-Oxley Act, to give the board that authority.”


This article originally appeared in the January 27, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.

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