Navigating Audit Complexities in the Crypto Era
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- On January 13, 2025
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The integration of cryptocurrencies into corporate strategies surged in 2023, transforming how businesses view digital assets. By the end of 2023, public companies held approximately 1.5% of the total Bitcoin supply. This marked a significant shift in corporate behavior, particularly from pioneers like MicroStrategy and Tesla. MicroStrategy remained one of the most aggressive adopters; by mid-2023, MicroStrategy continued expanding its Bitcoin holdings, reaching 152,333 BTC by June 2023, further cementing its position as the largest corporate Bitcoin holder. The firm strategically treated Bitcoin as its primary reserve asset, a move aimed at hedging against inflation and boosting returns. Tesla also retained a notable portion of its Bitcoin holdings despite fluctuations in the crypto market.
The global landscape for cryptocurrency adoption expanded rapidly in 2023. A 34% increase in crypto ownership pushed the total number of users to 562 million worldwide in 2024, according to a report by Triple-A. This surge was driven by several factors, including increased regulatory clarity, technological advances, and rising corporate interest. Regions like Asia and North America saw significant increases in crypto adoption, with Asia leading with 326.8 million owners. Regulatory guidelines from bodies like the Monetary Authority of Singapore (MAS) and the European Union (EU) played an important role in stabilizing the market, providing a framework that enabled corporations to confidently enter the crypto space.
In particular, the European Union’s Markets in Crypto-Assets (MiCA) regulation, passed in 2023, was a landmark for corporate crypto adoption. This regulation set clear guidelines on how businesses should manage and report on their digital asset activities. The move was seen as a major step toward mainstreaming crypto in Europe, encouraging financial institutions and public companies to invest in digital assets.
Additionally, cryptocurrency became more accessible as blockchain-based financial products, like decentralized finance (DeFi) platforms and stablecoins, gained traction. By August 2024, the total market capitalization of all cryptocurrencies had grown, with Bitcoin and Ethereum dominating the market share.
As companies began integrating cryptocurrencies into their financial operations, regulators worldwide had to tighten their oversight to ensure compliance, security, and transparency. Organizations such as the US Public Company Accounting Oversight Board (PCAOB) took proactive steps to address the complexities and risks associated with the burgeoning crypto industry.
The PCAOB established the Target Team in 2019 to address emerging audit risks and other critical topics affecting the auditing landscape. As part of its mandate to protect investors and enhance audit quality, the Target Team conducts in-depth reviews and inspections across audit firms, offering insights into specific audit areas. The 2023 inspection cycle focused on three primary areas: crypto assets, multi-location audits, and significant or unusual transactions.
Key Focus Areas in 2023 Inspections
In 2023, the PCAOB Target Team targeted public company audits related to emerging risks in three main areas:
Crypto Assets: With the disruptions in the crypto market and the rise of crypto-related activities, the PCAOB placed significant emphasis on understanding how audit firms addressed these challenges. The inspections focused on understanding the auditors’ approach to assessing crypto-asset risks, the tools used, the involvement of subject matter experts, and the sufficiency of audit procedures conducted.
Multi-Location Audits: In light of geopolitical instability and the shift of companies away from China-based audit firms to those in the U.S., the inspections revisited audits involving multiple locations. The aim was to review the strategies auditors employed to manage risk and coordinate work across multiple jurisdictions.
Significant or Unusual Events or Transactions: The PCAOB focused on how audit firms responded to risks posed by one-off events or transactions, such as cybersecurity breaches, lawsuits, and restructuring activities, which could significantly impact financial reporting.
Focus on Crypto Assets: Key Observations
One of the most crucial areas of the 2023 inspections involved audits of public companies with material crypto asset activities.
The PCAOB’s Target Team conducted inspections in 2023 focused on audits of public companies with crypto asset activities. These inspections spanned 11 audits across four U.S. global network firms (GNFs). The primary objectives of the inspection procedures were to assess how audit firms handled the increasing involvement of crypto assets in public company audits. Key areas of focus included:
- Audit Planning for Crypto Activity: Inspectors examined whether audit firms had developed sufficient plans for addressing crypto-related risks and whether engagement teams used firm-developed tools and templates effectively.
- Personnel Expertise: The inspections also aimed to determine if audit teams possessed the requisite skills and knowledge to handle the complexities of crypto asset transactions.
- Use of Specialists and Consultations: Inspectors evaluated the use of industry experts, consultations with subject matter groups, and the procedures put in place to support audit teams.
Key Findings
The inspection results revealed several deficiencies across five public company audits involving crypto assets:
- Risk of Material Misstatement: Some audit teams failed to conduct adequate procedures to address risks related to customer crypto revenue transactions. Instead of focusing on relevant data, their tests were limited to data inputs that were not sufficiently tested.
- Internal Control Weaknesses: Auditors did not gather sufficient evidence on controls regarding the safeguarding of crypto assets, particularly those held on behalf of customers. Some audits also lacked appropriate testing of information technology general controls (ITGCs), which are vital for ensuring the security of these assets.
- Audit Evidence Issues: The PCAOB observed that some engagement teams did not properly test the completeness of transactions related to crypto assets, particularly movements out of cold storage or system changes.
- Auditor Independence A notable deficiency involved auditor independence. The PCAOB identified instances where an audit firm did not perform any procedures to determine compliance with SEC and PCAOB independence standards. This failure highlights the risk of conflicts of interest that could compromise audit integrity, especially in high-risk areas like crypto asset engagements.
Additional Observations
The Target Team also shared observations that, while not deemed deficiencies, posed risks if left unaddressed. These included issues with the security of private keys, the safeguarding of crypto assets held by third-party custodians, and how auditors evaluated related service organization controls. Furthermore, the audits raised concerns about firms not reporting non-U.S. audit participants in their filings.
Good Practices Identified
Despite these challenges, several good practices were highlighted:
- Use of Specialists: All public company audits with material crypto balances employed specialists or subject matter experts to support audit procedures related to crypto asset transactions.
- Consultation and Staffing: Senior engagement team members with specialized skills in crypto assets were involved in many audits, and consultations with experts were conducted on critical issues like crypto asset staking and risk assessments.
In conclusion, while the PCAOB identified notable deficiencies, the use of specialists and consultation procedures demonstrated positive steps toward improving audit quality in the rapidly evolving crypto asset space.
KNAV Comments
Emerging technologies, such as crypto assets, are reshaping the financial reporting landscape and require auditors to be proactive in their approach. Auditors must continuously update their expertise to assess how these innovations impact financial statements and to ensure accurate, reliable reporting. The PCAOB’s Target Team’s 2023 inspections highlighted the challenges audit firms face in adapting to these technologies, particularly in areas like crypto asset auditing. While the inspections revealed deficiencies, they also showcased good practices, including the use of specialized professionals. However, reliance on specialists alone is not enough—audit firms must continue to enhance their own technical capabilities, develop advanced tools, and implement more robust control measures to maintain high audit quality for companies involved in the crypto market.
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