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Auditors with egg on their faces | accountingweb
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FTX failure marks new low for audit standards

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The $30bn collapse of cryptocurrency exchange FTX should send shockwaves through the accountancy sector, which yet again has egg on its face.

24th Nov 2022
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Accountants could reasonably have reacted to a headline in The Observer which read “Polyamory, penthouses and plenty of loans: inside the crazy world of FTX” in more than one way. The man or woman in the street might have been poring over the gory details of who did what to his girlfriend/boyfriend, but the really exciting story was only going to be derived by viewing the financial shenanigans behind the sex.

Therefore, on reading the scandalous tales of how cryptocurrency exchange FTX turned from a $30bn licence to (not) print money into an invisible heap of junk, worthless to anyone but the liquidators, this accountant’s immediate reaction was to scour the internet in search of the auditors’ identity. After all, this showed signs of being a financial scandal fit to compete with Enron and look what that did to Arthur Andersen.

Given what has happened over the past couple of decades, including the collapse of Enron and its leading accountants, what went on behind the scenes in the world of crypto is truly unbelievable.

The big question was which of the Big Four was in the frame this time. Pleasingly for them, none got anywhere near to Sam Bankman-Fried’s short-lived but spectacularly successful empire.

Crypto exchange

The FTX empire was centred on a crypto exchange – a kind of ethereal stock exchange dealing in cryptocurrencies. However, according to press reports the group had four distinct elements: FTX’s US crypto exchange, its hedge fund Alameda Research, its venture capital arm, and its international exchange.

While we ageing accountants would naturally assume that each would be distinct, with accounts carefully drawn up and any interchanges between the different parties recorded faithfully, it appears that former billionaire Bankman-Fried acted in the same way as some of our favourite clients, who used to be referred to as “brown paper parcel jobs”.

Broadly, he treated all money as his own – even, reputedly, sums held in client accounts – borrowing the odd few hundred million when he wanted to buy property in the Bahamas and many times more to gamble on cryptocurrencies via the trading arm Alameda Research, which was eventually the group’s downfall.

Some readers might already be smirking, having decided long ago that crypto dealing was the equivalent to putting your life savings on a horse, a number on a roulette table, or a ferry company with no ships.

Caught red-handed

When caught red-handed, rather than offering up the kind of reaction favoured by criminals in TV shows – “You got me banged to rights, guv” – our modern-day Robbing Hood was apparently quoted as declaring on Twitter: “F*** regulators they make everything worse.”

So who were the auditors if they weren’t members of the Big Four?

FTX’s new chief executive and de facto administrator/liquidator, John Ray III, has overseen some of the biggest bankruptcies ever, including the collapse of the energy giant Enron. He described FTX’s failure as “unprecedented” and said in court documents filed last week: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”

A quick surf of the world wide web informs us that the job was shared between Armanino and Prager Metis – sound familiar? I didn’t think so.

Both have glitzy-looking websites that advertise their wares but provide little justification for appointment as auditors to businesses worth tens of billions of dollars.

Armanino is one of the top 25 largest independent accounting and business consulting firms in the United States with 21 generally small offices nationwide, but primarily in California.

It is good to know that we can: “Count on Armanino to think strategically and provide sound insights that lead to positive action. We address not only your compliance issues, but also your underlying business challenges.” One wonders whether that includes losing $30bn of other people’s money.

To quote from the Prager Metis website, the company “is a top international advisory and accounting firm with over 100 partners and principals, more than 600 team members, and twenty-four offices worldwide”. 

While the firm might wish to think of itself as the next PwC, when its UK presence comprises just a four-partner London office, there is a little way to go yet.

Money flowing willy-nilly

If the press coverage is even vaguely accurate, it is hard to see how no one spotted money flowing willy-nilly between different parts of the business and to the principals without adequate controls. Going further, the fact that it disappeared without trace in a few days raises many questions.

It may take years to discover the full story but surely it is time for governments, regulators and accounting bodies to take serious action over the appointment of auditors. When projects like this end in disaster it means almost unimaginable losses for numerous stakeholders.

Replies (7)

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By Justin Bryant
24th Nov 2022 12:22

I think the bigger and more interesting point here is how surprising it is that so many (presumably (previously) wealthy) suckers bought into this crypto c*ap in the 1st place (despite the numerous warnings from central banks, regulators and virtually everyone on this website who like Bill Gates knows a Ponzi scheme when they see one), regardless of how good or bad the auditor was.

Luna was another recent example (so it's wrong to say FTX was unprecedented).
https://www.forbes.com/sites/qai/2022/09/20/what-really-happened-to-luna...

But then again, it also happened with tulip bulbs didn't it?

In other words, these so-called investors only have themselves to blame here in my view (i.e. unless a balance sheet or whatever reflects proper real valuable assets and not intangible c*ap this is bound to happen sooner or later).

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Replying to Justin Bryant:
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By JustAnotherUser
24th Nov 2022 14:31

Ah tulips again. Tulips, the south sea, the housing market, the stock market, the dot com......

Ironically the tulip-mania story is largely a myth, and mostly fiction. Any 'mania' lasted a few months..... as they say in the crypto, do your own research.

This is a good write up about failed auditing and VC /corporate corruption and greed.... the sad part of this is that the majority of investors and the billions they pumped into this, they will just swallow the loss and leave the average Joe in the dirt...
...these funds throw $100m at a dozen projects and 1 succeeds, they make bank.

'Pension Giant Ontario Teachers' Plans to Write Off All $95M Invested in Crypto Exchange FTX... less than 0.05% for them'

Sequoia Capital put 1 billion in but manage 85 billion, not something you want to lose but this is the business they are in where 80% of the wins come from 20% of the investments (Sequoia on the whatsapp/facebook deal was $60M investment into $3B.)

I doubt many of these investors took much of a look at the books on this one.

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Replying to Justin Bryant:
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By Justin Bryant
01st Dec 2022 10:04

This confirms my view that poor auditing was likely the very least of the problems here: https://www.bbc.co.uk/news/technology-63817522

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Replying to Justin Bryant:
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By Justin Bryant
01st Dec 2022 13:17

And even if it's not all worthless you have this potential problem: https://www.lawgazette.co.uk/practice/crypto-fraud-victim-wins-informati...

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By Paul Crowley
24th Nov 2022 14:20

It would be helpful to point out that it is the USA standards that failed
This was a total fraud with just so many tax haven, unregulated companies and under the wire interactions between them
Any decent auditor would have declared the mess to be unauditable

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Replying to Paul Crowley:
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By Hugo Fair
24th Nov 2022 22:25

And that's the point in a nutshell ... "Any decent auditor would have declared the mess to be unauditable". So why didn't they do so?

Auditors can't all be entirely incompetent (greedy, yes - lazy, undoubtedly - and compromised, nearly always) ... so one has to ask whether the basic concept of Audit is itself flawed (enable to deliver what is required).

Generally it's not the auditors committing the primary fraud, so where are the day-to-day controls on management behaviour/activities ... and why aren't the directors fined personally & heavily and/or banned properly from comparable roles?

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By dejaneiro2005
28th Nov 2022 16:23

Surprised there is no mention of FTX on the news sections of either website:

https://pragermetis.com/news/
https://www.armaninollp.com/articles/

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