Jack Castonguay is an associate professor of accounting at Hofstra University and vice president of learning & development for KnowFully Learning Group.
Frauds don’t happen by accident – they require intent. In the rare instance that a fraud does occur, investors expect that the gatekeepers of fair financial reporting, the auditors, will be there to detect the fraud and protect their investment before it’s too late. But what happens when the gatekeepers don’t comply with the industry’s bare minimum standards of competency and quality? We get FTX’s bankruptcy and Prager Metis’ audit failure.
Auditing standards require at a minimum that auditors understand the entity and its environment, that it has the competency and independence to perform the audit, and that it can’t effectively staff the audit, among other things. These standards apply whether the audit client is a first-time client, a small local thrift shop, or a multibillion-dollar cryptocurrency exchange with a related party trading firm.
The SEC’s actions should be warning signs to accounting firms regardless of their involvement in the cryptocurrency or blockchain industry. Just because there is a new and interesting field, like crypto, seeing huge inflows of cash doesn’t mean all accounting firms should jump in headfirst, even if there is new a market with new revenue streams waiting. Gaining an understanding of a new technology and industry takes time, research, and experience.
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