US auditor: Reserve holdings are not proof of a company’s financial strength

US auditor: Reserve holdings are not proof of a company's financial strength

The Public Company Accounting Oversight Board (PCAOB), a nonprofit corporation established by Congress that oversees audits of public companies in the US, has issued advice warning investors about auditing firms’ proof-of-reserves (PoR) reports. The PCAOB, which is supported by the US Securities and Exchange Commission (SEC), stated that investors should not put excessive trust in PoR reports that fall outside of the board’s supervision powers. According to the US group that monitors auditing standards, proof-of-reserve reports regularly claimed by crypto businesses to persuade clients that their financial transactions are in safe hands can not be believed.

Reports that count reserve holdings as proof of a company’s financial security do not give “meaningful assurance.” These are not audits, according to the board, and they do not conform to any certain standard. In the absence of full-scale audits that are a trademark of old school finances, proof-of-reserve reports are commonly used by U.S. digital asset businesses, such as Kraken’s report that it held $19 billion in bitcoin and ether and’s data in December that client assets were fully backed one-to-one, as well as global platforms such as Binance.

Furthermore, the board claimed that PoR reports do not give guarantees on the status of the assets after they are issued. The PCAOB claims that PoRs do not indicate whether assets were used, loaned, or inaccessible to clients after the report was published. In addition, the board stated that PoR reports do not give confidence regarding the efficacy of internal controls or the governance of the crypto business.

“Proof of reserve reports are inherently limited, and customers should exercise extreme caution when relying on them to conclude that there are sufficient assets to meet customer liabilities,” the advisory added. The board also stated that PoR reports are not carried out in compliance with PCAOB auditing requirements. Additionally, the board stated that there is a lack of consistency among service providers that make PoR.

Following the FTX crisis, numerous crypto exchanges began to provide PoR reports in an attempt to reassure investors of their financial situation. OKX, a cryptocurrency exchange, announced $7.5 billion in liquid assets in its PoR report on January 19. After 45 days of testing, exchange MEXC Global also issued its PoR on February 23. Binance, a cryptocurrency exchange, just added 11 tokens to its PoR report, reporting a total of $63 billion in reserves on March 7. 

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