Top professional services firms are hiring hundreds of blockchain and cryptocurrency experts to offer auditing services to companies involved in the nascent and loosely regulated sector.
Cryptocurrency prices skyrocketed towards the end of last year in the biggest speculative boom since dotcom fever, fuelling the creation of numerous crypto start-ups.
Major accountancy firms, including EY, PwC and KPMG, have since rushed to offer services to those with a foothold in the sector, despite a lack of consensus around how digital assets should be accounted for, as well as concerns that the market is vulnerable to fraud and money laundering.
These Big Four firms are ramping up their investment by hiring specialised staff and developing their own in-house technologies to support the crypto audit process.
“It’s a no brainer,” said Jeanne Boillet, global assurance innovation leader at EY, which said it had more than 150 clients worldwide involved in crypto assets as of September. “We have no choice than to address this because some of our clients have invested in that space.”
Auditors turn to blockchain as crypto prices fall
Ms Boillet said that in addition to companies holding and trading in cryptocurrencies, EY’s clients included crypto exchanges, crypto mining firms and traditional companies using blockchain technology.
Rival PwC said it had taken on a similar array of clients and currently employed about 400 “blockchain experts” globally, across multiple divisions, including its consultancy business.
“We are in the midst of a rather significant effort,” said Ralph Weinberger, leader of Pwc’s global network assurance methodology group. “We are devoting significant resources to how we might provide audit services in not just cryptocurrency, but blockchain.”
Cryptocurrency prices have slumped from their mid-January peaks, as the sector battles concern over fraud and manipulation, and continues to be viewed with scepticism by most mainstream banks.
But even as the hype dies down, accountancy firms argue that businesses will continue to use the blockchain technology underpinning it.
Blockchains allow encrypted data on anything, from money to medical records, to be shared between many companies, people and institutions.
This protects data from fraud while instantly updating all parties concerned. Proponents expect companies from many sectors to increasingly launch their own private blockchains in the future.
Both EY and PwC have launched their own blockchain auditing tools this year. EY said it was building a further seven blockchain platforms “for the cryptocurrency ecosystem”.
‘It’s clear that more work needs to be done’
But there are risks associated with such rapid progress. There is currently no clear guidance for how the assets should be accounted for or audited, as they do not fall neatly under current standards — so firms are drawing up their own processes.
“It’s really about proper careful application of current rules and reading the lines between what fits and what makes sense,” said David Lyford-Smith, technical manager at the Institute of Chartered Accountants in England and Wales, an industry body. “But that does lead to some disagreements about what’s the best treatment.”
He said that most auditors viewed cryptocurrencies as intangible assets, though in some cases they were being treated as inventory.
Regulators are also beginning to circle the fledgling sector.
In a letter sent to MPs as part of an inquiry into the cryptocurrency sector earlier this year, the Financial Reporting Council, the UK’s accounting watchdog, said: “In the absence of specific guidance, there is a risk that diverse accounting practices will develop and become entrenched.”
The watchdog told the Financial Times that auditing cryptocurrencies was not currently “a material issue for UK financial institutions and large corporates”, but that it was monitoring the situation and would intervene if there were “significant divergence of practice”.
In September, the International Financial Reporting Standards’ guidance committee discussed “how an entity might apply existing IFRS Standards in determining its accounting for holdings of cryptocurrencies”, according to its website. Its standards board will assess in future whether the topic needs to be added to its formal agenda.
“It’s clear that more work needs to be done by the FRC and others,” said Andrew Gambier, head of audit and assurance at the Association of Chartered Certified Accountants, the global professional body.
Tackling ‘negative reputational issues’
But there are additional challenges for auditors appraising cryptocurrencies rather than traditional money, such as valuing assets prone to wild and unexpected swings in a market where pricing can differ between exchanges.
Jatin Patel, a director in the investment management and funds audit practice at KPMG, said “the hardest piece is verifying ownership”, given the anonymity afforded to holders of most digital currencies.
KPMG audits several dozen funds that hold cryptocurrencies, as well as crypto exchanges in Japan and the Cayman Islands.
But Mr Patel added that proof of ownership was becoming easier as crypto custodians — companies that store cryptocurrencies securely from hackers in the same way that custodian banks safeguard financial assets — become more prevalent.
Firms also argue they carry out due diligence on potential crypto clients, sometimes going beyond their standard procedures.
“We are pushing and challenging companies in this industry so that [their] controls are proper and secure,” Ms Boillet of EY said.
“There’s a lot of negative reputational [issues],” said Mr Lyford-Smith of the ICAEW. “But if corporate companies are making use of these technologies . . . then they are going to need to be audited. It’s reasonable that the top [accounting] firms are going to respond to that need.”