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Crypto & Financial Audits: Expertise When You Need It

Overview

The cryptocurrency and blockchain industry is rapidly evolving, and regulations are hard-pressed to keep up. Because accounting guidance for crypto initiatives is sparse and the regulatory framework is complex, crypto companies find it difficult to provide their customers, vendors, lenders, and other stakeholders appropriate and reliable financial information.

We recently worked with a company that provides a platform for customers to buy and sell cryptocurrencies through digital currency machines across the U.S. The Company had entered into a sale-leaseback transaction with a bank. However, the Company needed to provide the bank audited financial statements before it could draw funds from the transaction.

Challenge

The Company had never been audited before and approached Wolf & Company to perform a financial statement audit for the 2019 year and their opening balance sheet as of December 31, 2018. Due to the COVID-19 pandemic, the financial audit needed to be completed remotely, and since the Company wanted to access the sale-leaseback funds as soon as possible, the project timeline was very tight.

Wolf’s audit team faced several obstacles during this engagement, and had to develop innovative solutions to address operational, IT, and accounting challenges.

The Company’s Chief Financial Officer and Controller both began working at the Company in late 2019 and didn’t have much visibility into accounting practices prior to their employment, so our team carefully led them through the necessary elements of the audit process.

On the technology side, the Company’s software for processing transactions didn’t have a System and Organization Controls (SOC) report, so we were unable to rely on the reporting it produced. To overcome this challenge, our IT specialists analyzed the present access and IT general controls to ensure that this system was operating effectively, processing the cryptocurrency transaction, and calculating the revenue earned by the Company.

We also had to implement creative solutions to verify the existence of the cryptocurrencies in the Company’s digital wallets. Support was not maintained by the previous accountants, and in order to audit the balance within each digital wallet, we had to make sure that the amount of cryptocurrency that they recorded was appropriately stated. Because the blockchain technology utilized by the Company didn’t allow for retrospective point-in-time review of holdings, we created alternative methods to determine the balance. We used external confirmations, as well as rollback and rollforward approaches to verify the assets of the Company.

There are many hurdles in the crypto realm that require nuanced expertise to navigate. For instance, there’s no authoritative accounting guidance for how to determine the value of, or account for, cryptocurrency. Bitcoin isn’t considered a security by the Securities and Exchange Commission (SEC), but interpretive guidance and industry practice has considered it an indefinite-lived intangible asset valued at cost. This created some difficulties for the Company when tracking the asset. We had to use existing accounting guidance and adapt it to this situation, which allowed the Company to track the first-in-first-out (FIFO) cost of digital assets held at the end of each year. As part of our requirement to assess the Company's compliance with laws and regulations, Wolf was able to leverage our regulatory compliance expertise in evaluating the Company's Anti-Money Laundering (AML) and Know Your Customer (KYC) practices. We were also able to interpret and apply existing accounting guidance to help determine whether the Company had ownership over the digital assets held on their behalf by third-party custodians.

Outcome

Wolf issued the audited financial statements six weeks from initial engagement to successfully meet the deadline—ensuring the Company received the necessary sale-leaseback funds quickly. Senior management teams of the Company and Wolf held weekly meetings to make sure continuous progress was made, the engagement was on schedule, and there were no surprises. We provided guidance to the Company which allowed them to adjust their opening balance sheet for 2018 and their 2019 financial statements to become Generally Accepted Accounting Principles (GAAP) compliant. We also provided innovative best practice and control recommendations to enhance financial reporting and oversight functions.

Based on limited guidance, we tailored our approach to specifically meet the unique needs of the Company while following American Institute of Certified Public Accounts (AICPA) practice aid and Public Company Accounting Oversight Board (PCAOB) risk assessment guidance. Through diligent communication, sophisticated use of technology, and in-depth industry knowledge, we were able to provide the same level of quality as an in-person audit, remotely and safely. Based on the Company’s confidence in our audit performance, responsiveness, and ability to meet deadlines, we were then asked to perform additional tax and SOC reporting services.

Takeaway

  • Significant experience in the crypto and blockchain industry allows us to provide tailored solutions to your specific challenges through the combined expertise of our IT, regulatory compliance, and financial statement audit professionals.
  • Open communication, continuous guidance, and fast response time ensures a thorough and smooth financial audit.
  • Extensive technological capabilities and innovative practices provide a high-quality remote audit experience.