- The Public Company Accounting Oversight Board recently issued an advisory for investors.
- The advisory warned investors about the reliability of PoR reports carried out by third parties for crypto entities.
The Public Company Accounting Oversight Board’s (PCAOB) Office of the Investor Advocate recently issued an advisory for investors regarding the proof of reserve (PoR) reports by service providers, including audit firms registered with the PCAOB, to crypto entities such as exchanges and stablecoin issuers.
PoR reports are not as reliable as audits
The PCAOB stated in its advisory that PoR reports are not audits and should not be relied upon by investors or the public. According to the Office of the Investor Advocate, PoR reports have significant limitations in the procedures that are followed for PoR verification.
They do not address the crypto entity’s liabilities, the rights, and obligations of digital asset holders, or whether assets have been borrowed by the crypto entity to make it appear that they have sufficient collateral or “reserves.”
Furthermore, PoR reports do not provide assurance regarding the effectiveness of internal controls or governance of the crypto entity.
The lack of uniformity in service providers that cater to PoR needs of crypto entities is another issue, with some being performed by accounting firms while others are done by non-accountant assurance providers.
The advisory noted that in some cases, the management of the crypto entities also has discretion on whether the results of PoR reports are made public, including the extent and format of the information provided.
“Investors should note that PoR engagements are not audits and, consequently, the related reports do not provide any meaningful assurance to investors or the public,” the advisory read, adding that PoR reports are not subject to PCAOB inspection, and PoR engagements are not subject to uniform standards.
The collapse of the Bahamas-based crypto exchange FTX last November dealt significant damage to investors and crypto stakeholders.
In a bid to restore public confidence, crypto entities started publishing proof of reserves. The PoR reports provided an outline of the token holdings in cold wallets to reassure users of the platforms.
Popular crypto exchanges like Binance and Kraken published their PoR in the aftermath of the FTX scandal.
