The auditor of FTX’s bankrupt US exchange business said it stood by its work for Sam Bankman-Fried and was proud of having provided services for a cryptocurrency industry that needed to improve trust and transparency, but it would ditch its digital assets practice by the end of next month.
In the first interview by a leader of the accounting firm Armanino since the collapse of FTX last month, chief operating officer Chris Carlberg said “market conditions” had changed and it would stop providing financial statement audits and so-called proof of reserves reports for the crypto industry.
California-based Armanino gave a clean bill of health to 2020 and 2021 financial statements from FTX US, a branch of the Bankman-Fried crypto empire that offered trading for US residents. FTX US collapsed into bankruptcy along with FTX’s larger international exchange business last month.
Carlberg said Armanino “never had a client relationship” with either Alameda Research, Bankman-Fried’s crypto hedge fund, or FTX’s larger international exchange business, where the former billionaire is alleged to have defrauded customers of billions of dollars.
“We definitely stand by the FTX US work,” Carlberg said. “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. That happens with public companies. It’s not required by the standards for US private company audits.”
FTX court filings have described a sprawling group of companies where accounting was often chaotic and internal controls were deficient to non-existent. John Ray III, the expert brought in to manage the companies through bankruptcy, has said previous financial statements should not be relied upon.
Industry standards require only that auditors of a private company understand a company’s internal controls and plan their audit work accordingly. “The team engaged in the analysis required by the standards around that topic,” Carlberg said, “and, again, we feel good about the work we did in that area.”
Armanino and the auditor of FTX’s international operations, Prager Metis, are facing a lawsuit from FTX customers alleging “they were reckless or wilfully blind”. Carlberg declined to comment on the lawsuit.
Armanino is one of the 20 largest accounting firms in the US with revenue of about $500mn last year, according to Accounting Today, and more than 200 partners. It has also become a leading provider of proof of reserve reports for crypto ventures, a controversial product that is meant to attest to the safety of customer funds but which falls short of a full financial statement audit of the kind Armanino provided to FTX US.
Regulators have questioned the value of the product, which provides only a limited snapshot of a crypto venture’s true financial health. Mazars, another accounting firm, last week said it would stop providing such reports, and pulled work it had done for the crypto exchange Binance from its website.
The nine-person Armanino team that produces proof of reserves reports will leave the firm and set up a new entity to take over existing clients, with the separation due to be completed by the end of next month.
“Any professional services firm needs to adapt and re-evaluate, given big changes that have happened in the crypto market in the last couple of months,” Carlberg said.
The digital assets practice accounts for less than 1 per cent of the firm’s revenues but has attracted unwanted attention since the collapse of FTX, including through the resurfacing of messages from its Twitter account cheering Bankman-Fried’s appearances before US Congress.
“Our partners and our firm are proud of the work we have done in this space,” Carlberg said. “There is a need for additional trust and transparency.”
But he echoed Mazars in warning of the risk that proof of reserve attestations will be misunderstood by investors. “There continues to be a pretty big gap in understanding between what an audit or a proof of reserve offering provides to the recipients of those reports. Hopefully that gap of understanding changes over time, but it’s pretty big gap today,” he said.