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Audit group Mazars halts ‘proof of reserves’ work with crypto clients

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Mazars is halting work on “proof of reserves” reports for its cryptocurrency clients, including Binance, the world’s largest crypto exchange, saying it feared they would be misunderstood by the public.

The accounting firm had been hired by Binance and other crypto companies to conduct a “proof of reserves” report — something crypto exchanges have rushed to produce following the collapse of FTX as they seek to persuade nervous clients that they hold sufficient assets to match all customer deposits.

“Mazars has indicated that they will temporarily pause their work with all of their crypto clients globally, which include Crypto.com, KuCoin and Binance. Unfortunately, this means that we will not be able to work with Mazars for the moment,” Binance said in a statement on Friday.

Mazars said it had “paused its activity relating to the provision of proof of reserves reports for entities in the cryptocurrency sector due to concerns regarding the way these reports are understood by the public”.

The willingness of auditors such as Mazars to sign off these reports has been a key factor in soothing nervous investors as crypto exchanges seek to prevent “run on the bank” scenarios of the kind that sank FTX, which is alleged to have fraudulently made off with customer assets leaving a multibillion-dollar shortfall in client funds.

The reports are far more limited in scope than a traditional audit of a company’s accounts, including its liabilities, and are much less robust.

To prepare a proof of reserves report, an auditor uses procedures agreed with the company but does not vouch for whether those procedures are appropriate. The auditor also does not give any assurance or opinion over the numbers in the report, as it would in a full financial audit.

Mazars said proof of reserves reports “do not constitute either an assurance or an audit opinion on subject matter. Instead they report limited findings based on the agreed procedures performed on the subject matter at a historical point in time.”

Mazars’ decision to halt work on proof of reserves reports was not driven by specific financial problems at any of the companies, added the person briefed on its decision. The firm’s work was so limited that it had “not looked that much” into the financial position of the companies.

Earlier this week, more than $1bn was pulled from Binance as fears over the broader crypto market mounted, in lockstep with fears Binance could be the target of US investigations.

“Over the past week, Binance passed a stress test that should give the community extraordinary comfort that their funds are secure,” the exchange said on Friday, adding it was able to fulfil recent withdrawals “without breaking stride”.

Binance has said it holds more than $60bn in assets, sufficient funds to honour withdrawals. However, the company’s disclosures do not include its liabilities, which makes it difficult to ascertain Binance’s financial health. The exchange previously told the Financial Times that all client deposits were backed by corresponding assets and its “capital structure is debt free”.

In a recent interview with CNBC, Binance’s chief executive Changpeng Zhao refused to confirm whether the exchange would be able to finance a potential $2.1bn clawback from FTX, in the event that funds were requested as part of FTX’s ongoing bankruptcy proceedings.

“We are financially OK,” Zhao said, adding he would leave such issues to Binance’s lawyers.

On Friday, the exchange re-emphasised its plans to deliver proof of reserves to its customers but did not commit to a timeline.

“We have reached out to multiple large firms, including the Big Four, who are currently unwilling to conduct a proof of reserve for a private crypto company and we are still looking for a firm who will do so,” the exchange said.

Binance added: “We embrace additional transparency and we are looking into how best to provide those details in the coming months.”

However, some auditors are sceptical of the crypto industry’s commitment to transparency.

Following the collapse of FTX, Paul MacIntosh, EY’s US financial services crypto co-leader, said on LinkedIn that proof of reserves reports do not assess companies’ internal controls “which ultimately was the downfall of FTX”, he added.

“To move to true transparency and trust in the industry requires a much bigger step up,” he said, calling for the industry to invest in better accounting systems, IT controls and independent corporate governance.

Several audit firms have said they had elevated some or all of their crypto-related clients to the status of “high risk”, triggering more thorough work that will take longer and lead to higher bills.

Mazars had been recruited to verify the reserves of several crypto exchanges including Crypto.com and KuCoin. Mazars USA LLP is also the global auditor for the Kraken parent company, Payward Inc. The firm intends to continue its work on full audits of financial statements in the crypto sector, said the person briefed on its decision.

A representative from KuCoin said they were informed of Mazars’ decision and were “open to work[ing] with any leading and reputable audit[or]”.

A spokesperson for Crypto.com said the exchange recently completed proof of reserves in collaboration with Mazars, adding it would “continue to engage with reputable audit firms in 2023 and beyond”.

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