On Monday, Wesley Bricker, the head accountant for the US Securities and Exchange Commission (SEC) gave a speech at the American Institute of Certified Public Accountants (AICPA) National Conference on Banks and Saving Institutions in Washington, D.C. In it, he outlined several aspects that accountants and auditors should consider when preparing the financial statements of companies that hold digital assets and/or use blockchain technology.
Preparing Financial Statements
Bricker emphasized the importance of thorough and active record keeping of digital asset transactions and holdings. He suggested that before companies decide to participate in activities related to digital assets, they should first consider their accounting staff's knowledge of cryptocurrency and whether their existing policies are compliant with SEC regulations.
Anonymity and Disclosure
Bricker explained that although transactions on blockchain platforms can be public, identifying details of buyers and sellers can remain anonymous. Instead of names or legal identities, transactions are linked to alphanumeric codes, or "public keys."
According to Bricker, this presents something of a problem, as SEC regulations require financial disclosures to include "the identification of related parties, transactions with related parties, and any resulting balances." The reasoning behind this is to help to determine if the interests of a given party have been subverted by the interests of another – something investors might be eager to know. Bricker gave the example of market manipulators that "pre-mine" a certain type of cryptocurrency and end up holding large amounts of that digital asset. These market participants are able to affect the supply and demand for that coin and affect its price.
Effects of Non-Compliance
In his speech, Bricker mentioned that companies that participate in the cryptosphere may be subject to litigation, claims, and assessments, and that the company's management should be aware of this vulnerability.
To stay aboveboard, he suggests companies refer to the "numerous statements, letters, educational bulletins and enforcement cases available from the SEC's website, state securities regulators, and others such as FINRA that outline experience with (or expectations regarding) the effects of a company's activities that fail to comply with the securities laws."
Handling Potential Illegal Acts
Bricker directly addressed the professional auditors in the audience, emphasizing the need for auditors to keep up with the regulations, professional codes of conduct, and auditing standards concerning the use and financial reporting of digital assets.
Bricker stressed the importance of auditors recognizing their own strengths and weaknesses and making sure they have the knowledge, skills, and ability to correctly and thoroughly audit a company holding value in cryptocurrency.
Before accepting a company as a client, Bricker suggested that auditors take into consideration:
- "Relevant laws and regulations, including applicable securities regulations.
- The tone at the top in the company, including the commitment to integrity, compliance, and competency.
- The company's commitment to an effective control environment, including compliance with books and records requirements, internal accounting controls.
- The auditor's competencies to adequately identify and assess risks, design, and execute appropriate audit procedures and obtain sufficient, appropriate audit evidence."
During the speech, Bricker discussed the SEC requirement to report alleged illegal activities. He specified that auditors must detail how they discovered the illegal activities, and inform the company's management and the audit committee.
Even though blockchain and cryptocurrency technology has the potential to revolutionize the way almost every industry in the world does business, the fact that companies and auditors must adhere to regulations set by the SEC, or other government regulators, remains the same. In his closing statements, Bricker spoke to this fact, saying:
"Whether it is in the adoption of new accounting and auditing standards or the development of new markets, each of us has a responsibility to continue to apply the core financial reporting concepts that contribute to our robust markets."