The Public Company Accounting Oversight Board (PCAOB), the watchdog body that oversees audits of public companies in the United States, recently issued a notice warning investors about test reports of reserves (PdR) issued by auditing companies.
Crypto entities may engage a service provider to issue “proof of reserve” reports. A new Investor Advisory from the PCAOB’s Office of the Investor Advocate urges investors to exercise caution with these reports. https://t.co/aAykzlc7k1 #PCAOBresources pic.twitter.com/7S6jLCC2np
— PCAOB_News (@PCAOB_News) March 8, 2023
Crypto entities can contract with a service provider to issue “proof of reserve” reports. A new advisory to investors from the PCAOB’s Office of Investor Ombudsman urges investors to be wary of these reports.
The PCAOB, which is backed by the US Securities and Exchange Commission (SEC), said investors should not “undue reliance” on PoR reports that are not within the board’s supervisory authority. The notice stated the following:
“It is important to note that 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.”
In addition, the board also argued that PoR reports do not provide guarantees about the status of assets after the report is issued. According to the PCAOB, PdR reports do not reflect whether assets were used, loaned, or otherwise unavailable to customers after the report was published. Apart from this, the board also said that the PoR reports do not provide assurance in terms of the effectiveness of the internal controls or the governance of the crypto entity.
The board also noted that PoR reporting is not done in accordance with PCAOB auditing standards. Additionally, the board noted that there is a lack of uniformity with service providers conducting PoR.
“Proof of reserve reports are inherently limited, and clients should exercise extreme caution in relying on them to conclude that there are sufficient assets to meet clients’ liabilities,” added notice.
The warning came after many cryptocurrency exchanges jumped on the trend of providing PoR reports in an attempt to reassure investors of their financial status after the FTX debacle.. On Jan. 19, cryptocurrency exchange OKX declared $7.5 billion in liquid assets in its PoR report. On February 23, the MEXC Global exchange also published its PoR after 45 days of testing.
More recently, cryptocurrency exchange Binance also added 11 tokens to its PoR report, declaring a total of $63 billion in its reserves on March 7.
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