Armanino Defends FTX.US Audit and Exits Crypto: What’s Next for Crypto Audits?

The crypto world is still reeling from the FTX collapse, and the spotlight is now intensely focused on those who were supposed to be keeping watch – the auditors. Armanino, a prominent accounting firm that previously served FTX.US, has stepped forward to defend its work amidst growing criticism and has announced a significant shift in its crypto strategy. Let’s dive into what Armanino’s COO, Chris Carlberg, had to say and what it means for the future of crypto audits.

“We Feel Good” – Armanino Stands by FTX.US Audit

In a recent interview with the Financial Times, Armanino’s Chief Operating Officer, Chris Carlberg, addressed the elephant in the room: their audit work for FTX.US. Despite the dramatic downfall of the FTX empire and the ensuing questions about financial oversight, Carlberg asserted the firm’s confidence in the quality of their services. He stated quite clearly:

“We definitely stand by the FTX US work. A few industry voices have said that we should have done a better job auditing internal controls, but we were never engaged to audit internal controls.”

This statement is crucial. Carlberg draws a distinction between different types of audits, a point often missed in the broader conversation about crypto accountability.

Understanding the Scope: What Kind of Audit Was It?

To understand Armanino’s position, it’s important to grasp the nuances of audit engagements. Carlberg clarified that:

• Not a Public Company Audit: FTX.US, as a private company, did not require the same level of rigorous auditing as publicly traded companies. Public company audits mandate scrutiny of internal controls, a key element in ensuring financial integrity.
• Scope Limited to Agreed Terms: Armanino emphasized that their engagement with FTX.US was specifically for a private company audit, which, according to Carlberg, did not include an audit of internal controls. They performed the analysis required under the terms of their agreement.
• Confidence in Work Done: Based on the agreed-upon scope and the standards applicable to private company audits, Armanino expressed satisfaction with the work performed.

Essentially, Armanino is arguing that they fulfilled the contractual obligations and industry standards for the type of audit they were hired to conduct. This raises a critical question: Is the standard for private crypto exchanges sufficient in today’s volatile and rapidly evolving market?

Distancing from the FTX Empire: No International Ties

Carlberg also made it a point to distance Armanino from the wider, now-infamous FTX international business. He explicitly stated that Armanino:

• No Relationship with FTX International: The firm “never had a client relationship” with FTX’s international arm or any related entities beyond FTX.US.
• Focus on FTX.US Only: Their audit work was strictly confined to the American branch of the exchange.

This distinction is important for Armanino’s reputation. By highlighting the separation between their client, FTX.US, and the collapsed international entity, they are attempting to limit the reputational damage associated with the global FTX scandal.

The Exit Door: Armanino Leaves the Crypto Audit Space

Perhaps the most significant news from Carlberg’s interview is the confirmation that Armanino is stepping away from providing financial statement audits and proof-of-reserve reports to cryptocurrency firms. This news, initially hinted at by unverified sources, is now officially confirmed.

Why Exit Now? Market Conditions, Not Just Reputational Risk

While it might be easy to assume that Armanino’s departure is solely due to reputational risks stemming from the FTX saga and the class-action lawsuit filed against them and Prager Metis by FTX customers, Carlberg suggests a different primary driver: market conditions.

According to reports from mid-December, Armanino was already considered to be among the auditing firms, alongside Mazars and BDO, contemplating a retreat from the crypto sector. This suggests a broader trend within the accounting industry.

Implications of Armanino’s Exit and the Auditor Exodus

Armanino’s exit from crypto audits, along with other firms reportedly following suit, has significant implications for the crypto industry:

• Increased Scrutiny and Regulation: The withdrawal of established audit firms may be interpreted as a sign of increased risk and regulatory uncertainty in the crypto space. It could further fuel calls for stricter regulations and oversight.
• Trust Deficit: If fewer reputable firms are willing to audit crypto companies, it could erode trust in the financial reporting of these entities. This is particularly concerning for exchanges and platforms that handle user funds.
• Challenges for Crypto Firms: Crypto companies will face challenges in finding auditors, potentially leading to delays in financial reporting and increased costs. Smaller firms might be forced to rely on less established or specialized auditors.
• Need for Specialized Crypto Audit Standards: The situation underscores the need for developing clear, industry-specific audit standards for crypto companies, addressing the unique risks and complexities of digital assets. This could involve defining the scope of audits, particularly concerning internal controls in the context of decentralized and often opaque crypto operations.

Looking Ahead: The Future of Crypto Audits

Armanino’s defense of its FTX.US audit and its subsequent exit from the crypto audit market highlight a critical juncture for the cryptocurrency industry. While Armanino stands by the work it performed within the defined scope of its engagement, the broader narrative is shifting towards greater accountability and stricter oversight.

The departure of major audit firms signals a potential re-evaluation of risk within the crypto sector and emphasizes the urgent need for more robust and standardized audit practices tailored to the unique characteristics of digital assets. As the crypto landscape continues to evolve, the role of auditors and the standards they adhere to will be crucial in building trust and fostering sustainable growth.

The question now isn’t just about what happened with FTX, but how the crypto industry, regulators, and accounting professionals will collaborate to ensure greater transparency and accountability moving forward. The future of crypto audits is being written now, and it will undoubtedly shape the trajectory of the entire digital asset ecosystem.