Democratic senators urge accounting regulators to ramp up oversight of crypto auditors

Sens. Elizabeth Warren, D-Mass., and Ron Wyden, D-Ore., have urged the Public Company Accounting Oversight Board to take action against firms that audit crypto companies, raising concerns about their role in the crash of crypto exchange FTX.

“When PCAOB-registered auditors perform sham audits — even for firms that may lay outside of the PCAOB’s jurisdiction — they tarnish the credibility of the PCAOB and undermine confidence in the PCAOB-registered auditors that investors and the public rely on when making investment decisions,” the senators said in a letter addressed to PCAOB Chairwoman Erica Y. Williams, released to the public on Thursday.

According to the letter, former FTX CEO Sam Bankman-Fried touted the company’s audits to try and alleviate customers’ concerns before FTX filed for bankruptcy in November. However, such audits “failed to identify the alleged ‘old-fashioned embezzlement,’ ‘unprecedented’ lack of recordkeeping, and ‘utter failure of corporate controls’ at the heart of FTX’s collapse,” the letter states.

FTX’s audits were conducted by PCAOB-registered firms Armanino and Prager Metis, according to the letter. Armanino and Prager Metis did not immediately respond to requests for comment.

“The PCAOB definitely has responsibility for reviewing whether these firms that have taken on crypto clients are meeting the PCAOB’s auditing standards as well as professional standards in the securities laws that the SEC enforces,” said Francine McKenna, a lecturer in financial accounting at The Wharton School at the University of Pennsylvania, a CPA, and author of The Dig, a newsletter about accounting and corporate governance.

Ms. McKenna said that audit firms’ acceptance of “these dubious clients” and their work with them likely violates “the standards on client engagement acceptance and continuance.”

“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,” the senators wrote. “These misleading financial reports shake our confidence in the entire auditing industry.”

The PCAOB is also responsible for overseeing the auditors of both private and public broker-dealers, Ms. McKenna added, and crypto firms often have associated broker-dealers.

“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,” a PCAOB spokesperson said in an email.