SEC Issues Warning For “Proof Of Reserves” In Crypto Markets

The SEC Office of Investor Education and Advocacy issued an investor bulletin warning crypto investors about the dangers of trusting audits that don’t follow SEC rules and Public Company Accounting Oversight Board standards.

Many crypto companies and issuers of “stablecoin” have been working to assure investors that their funds are safe by releasing reports called “proof of reserves.” These reports are sometimes touted as equivalent to or more accurate than the standard audited financial statements. Companies may also issue a “calculation” or “valuation” report with much the same intent. However, the SEC warns that they are not the same thing, and may not be entirely accurate.

The SEC’s investor bulletin warns investors that these “proof of reserves” financial statements may not give a complete picture of the company’s stability. Investors should not rely on these reports as a complete picture of the stability of cryptocurrency in the same fashion as audited financial statements, the SEC says.

The Public Company Accounting Oversight Board (PCAOB)

This private-sector nonprofit corporation established in 2002 by Sarbanes-Oxley provides oversight on the audits of public companies and SEC-registered brokers and dealers. It includes compliance reports filed according to federal securities laws. The SEC has oversight authority over the PCAOB, which sets the standards for auditing.

Any SEC-registered broker dealer or publicly traded company is required to file annual reports with the SEC. These reports include audited financial statements which are designed and intended to show investors a complete, accurate and detailed picture of a company’s health as well as its risks. These reports and statements require an independent auditor that conducts audits according to SEC and PCAOB rules. The auditor is also subject to regulatory oversight by both.

Is It An Audit?

Some companies may present their “proof of reserves” in the same way that they would audit reports under the PCAOB standards and the SEC. For one thing, financial statement audits can only be performed by registered accounting firms. Proof of reserves and other ersatz “statements” may be compiled by registered or un-registered firms, or a different third party. There is no guarantee that the information is reliable, either.

Additionally, the firm that provides this information may not be subject to SEC and PCAOB regulations. Therefore, the services and information from these firms may not be up to PCAOB’s auditing standards.

The public and industry insiders both rely on the truth and accuracy of audits to feel secure that crypto and other companies are not maniulating its books and records. Non publicly traded companies may not do as robust of an audit as other companies or may rely on exagerated numbers or false data. Accouting and auditing firms may be held responsible if it conducts a false or inaccurate audit of a company, hedge fund or other company.

Attorneys Scott Silver and David Chase were recently guests for on the legal podcast Cut to The Chase where they discussed the SEC’s lawsuit against Coinbase and Binance. Scott Silver warned of the pervasive fraud and misrepresentation in the cryptocurrency markets, and the harm it causes investors.

Securities, Investment & Crypto Fraud Attorneys

Silver Law Group represents investors in securities and investment fraud cases. Our lawyers are admitted to practice in New York and Florida and represent investors nationwide to help recover investment losses. If you have any questions about how your account has been handled, call to speak with an experienced securities attorney. Most cases are handled on a contingency fee basis, meaning that you won’t owe us until we recover your money for you. Contact us today at (800) 975-4345 for a no-cost consultation.