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Chair Williams Says PCAOB Has No Authority to Inspect Audits of FTX

November 30, 2022

PCAOB Chair Erica Williams set the record straight about the board’s audit inspection program, with questions being raised about not only the role of accountants and auditors but also that of the board following the spectacular collapse of crypto empire FTX Trading Ltd. and subsequent bankruptcy filing of crypto lender BlockFi Inc. (See BlockFi, Once Fined by SEC, Declares Bankruptcy Following FTX Collapse in the Nov. 29, 2022, edition of Accounting & Compliance Alert.)

For example, FTX said that financial results were audited by Armanino LLP, which is reportedly one of the 20 largest accounting firms in the country by revenue, and Prager Metis CPAs.

“I want to offer a word of caution to investors about what it means for a firm to be registered with the PCAOB,” Williams said in response to a question about the board’s view on audits of crypto at the 17th Annual Audit Conference hosted by the Baruch College Zicklin School of Business in New York. She spoke via Zoom.

“The PCAOB only has jurisdiction over the audits of public companies and broker dealers. FTX was not a public company, and therefore the PCAOB could not inspect its audits,” Williams explained. “At the same time, you may have seen FTX touted the use of the auditors that were registered with the PCAOB. And it’s important to understand that PCAOB-registered firms only have to follow PCAOB standards and rules when they’re auditing public issuer or broker dealer under our jurisdiction, not for any other clients. We don’t have authority to inspect their audit of other clients like FTX. So, we were not able to evaluate the work on those engagements or hold them accountable for insufficient work.”

The PCAOB was set up by the Sarbanes-Oxley Act of 2002, and firms must follow its rules and be inspected if they audit SEC-registered public companies or broker-dealers.

But some have been confused about the exact roles regulators play in the digital asset markets and have asked where the regulators were to help prevent investor losses. Regulators, including SEC Chair Gary Gensler, have said that it is the bad actors who refuse to come under existing securities regulatory framework are partly to blame.

If a firm’s cryptocurrency functions like a security, Gensler repeatedly said that the firm must register with the SEC or get an exemption from following the securities laws. Likewise, he said that crypto trading platforms must also be regulated like a traditional exchange if those platforms trade crypto assets that function like a security.

While the PCAOB did not inspect the audits of crypto firms, Chair Williams suggested investors and audit committees ask questions about firms that tout that they are registered with the board, thereby giving them an aura of credence.

The PCAOB publishes inspection results for audits of firms that are under its jurisdictions, “and those reports can inform investors about the quality of the work performed on those audits,” she said. “So, I encourage all investors and audit committees to ask questions if a firm touts itself as being PCAOB registered, find out its track record, look at our inspection reports and be cautious about drawing conclusions where the PCAOB doesn’t have jurisdiction.”

In the meantime, “our [audit inspection] team is constantly adjusting to be responsive to new and emerging risks across the globe. And our inspection’s team has prioritized inspections of audit engagements involving cryptocurrency,” Williams said.

[Thomson Reuters]