By Eyo Effiong, CPA, and Tim Savage, CPA
Like any other type of business in any other type of industry, cryptocurrency organizations should proactively monitor their business operations processes, effectiveness of corporate governance, and internal controls in their accounting processes.
In light of recent events in the digital asset markets, there is an increasing need for coordinated regulatory guidance to enhance consumer protection. The collapse of digital asset exchange known as FTX is a real-world case study pointing to areas where the digital assets industry needs to improve.
Recent cryptocurrency exchange failures were not caused by technological issues but by a lack of structure in corporate governance and internal controls.
Across various industries, history has shown repeated failed outcomes of major organizations that do not have effective corporate governance and internal control structures. The recent crypto exchange failures were not necessarily caused by digital assets based on a blockchain network, although the usefulness of certain centralized exchange tokens could be called into question. Instead, these failures are similar to other large corporate scandals that have occurred in the conventional world of finance.
As information surrounding the collapse of FTX continues to surface, it appears that necessary corporate governance mechanisms for organizational oversight were not in place. It is currently reported that the international FTX entity headquartered in The Bahamas did not have a board of directors. For a multi-billion dollar company with global operations, a board of directors providing strategic direction and accountability over company management would be appropriate and expected.
Furthermore, it appears the international FTX entity did not have effective internal controls in place to mitigate the risks of improper financial reporting. Current reports indicate that the organization’s accounting processes were minimal, lacked structure, and would have failed many of the requirements set forth by jurisdictions with higher regulatory oversight. Combined with the complexity of digital asset accounting logistics, the lack of effective internal controls is representative of other financial fraud cases that have occurred over the past few decades.
Proactive Considerations for the Crypto Industry Going Forward
Crypto organizations should consider proactively monitoring their business operations practices, the effectiveness of corporate governance, and internal controls in their accounting processes. These organizations should consider instituting a continuous operations gap analysis with a key focus on the risk assessment process. Additionally, crypto organizations should consider mapping accounting process flows, assessing and testing internal controls, and ensuring management has proper oversight.
Crypto organizations should proactively prepare for a new regime of accounting standards and financial reporting requirements.
Eyo Effiong, CPA, MBA, has more than 11 years of experience with the complex issues facing companies in the Blockchain and Digital Assets, Healthcare, technology, manufacturing, Hospitality, employee benefit plan, and oil and gas industries. He leads financial audits for companies with assets up to $450 million and consolidated revenues of $100 million.
As the senior manager, he supervises and reviews the work of staff auditors, reviews draft financial statements, provides guidance on complex accounting issues, and works proactively hand-in-hand with his clients to ensure deadlines and GAAP compliance are met. Eyo earned his bachelor’s and Master’s degrees in accounting from Winthrop University.