Investors and customers of crypto entities have been cautioned to exercise caution when relying on third-party verification or proof of reserve reports (PoR Reports) in order to ensure that there are sufficient assets to meet customer liabilities.
The warning was issued by the Public Company Accounting Oversight Board’s (PCAOB) Office of the Investor Advocate staff, and while it does not represent the views of the Board or other PCAOB staff, it is important for investors to take note of the potential limitations of PoR Reports.
The reports, which are often issued by PCAOB-registered audit firms, are intended to provide an asset verification for a particular moment in time, subject to significant limitations based on the procedures performed. They often do not address the liabilities of the crypto entity, the rights and obligations of digital asset holders, or whether the assets have been borrowed to make it appear that there are sufficient reserves to meet customer demands.
In addition, PoR Reports do not provide assurance about the effectiveness of internal controls or governance of the crypto entity, and there is a lack of uniformity regarding service providers that perform PoR engagements.
The PCAOB warns that while PoR Reports may provide some reassurance to customers of crypto entities, they are not equivalent or more rigorous than an audit, and they are not conducted in accordance with PCAOB auditing standards. Therefore, they do not provide any meaningful assurance to investors or the public.
Furthermore, some PoR engagements are performed by accounting firms, while others are performed by non-accountant assurance providers. The management of the crypto entity also has discretion on whether the results of PoR Reports are made public, including the extent and format of the information provided.
For these reasons, investors and customers are advised to exercise extreme caution when relying on PoR Reports to conclude that there are sufficient assets to meet customer liabilities. The reports are inherently limited, and they do not provide assurance that such reserves will be adequate as of the date of the report or in the future, or that customer assets will be protected.
In summary, PoR Reports are not a substitute for rigorous and comprehensive auditing, and customers should carefully consider their reliance on such reports before making any investment decisions. The crypto industry is still evolving, and investors must be vigilant in their due diligence to ensure that they are making informed decisions.
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