Blockchain has been heralded as a disruptive technology with the potential to transform regular financial processes into entirely transparent procedures built on secure and efficient transactions. Naturally, public companies are increasingly engaging with digital assets and the blockchain in a variety of ways, innovating in transacting and investing opportunities, as well as other areas of their operations.
This is an exciting time, but it’s important for financial markets stakeholders, including public company management, audit committees and external auditors, to understand the digital assets landscape and their financial reporting responsibilities.
Introduction to Blockchain and Digital Assets
“Blockchain is a form of distributed ledger, which is something we accountants should be very familiar with, and it allows a group of participants to agree, using some kind of consensus mechanism, what sort of transactions and data to append to the ledger at various points of time,” said Robert Sledge, Partner, KPMG.
Blockchain can be used in a variety of ways, including crypto assets non-fungible tokens.
“From a company perspective, we’re seeing companies using cryptographic assets in a variety of ways. It might be an exchange, it might be the rights to a good, or it might be the rights to a service,” said Beth Paul, Partner, PwC.
While companies are increasingly engaging with various applications of blockchain technology, adoption of the technology has not been universal.
“Crypto is not ubiquitous at this point, particularly among public companies,” said Taylor Harris, Professional Practice Fellow, CAQ. “The CAQ recently did a survey of audit partners and found that 67% of audit partners stated companies within their industries were not accepting or considering accepting crypto as a form of payment.” While audit partners reported that no industry is making significant moves toward adopting cryptocurrency as a form of payment, audit partners did report that approximately 51% of financial services companies are preparing to do so or considering such a move.
The Regulatory Landscape
Congress and regulators, like the SEC, CTFC and others, are paying close attention to the digital assets space.
“As a new and emerging technology, digital assets have definitely drawn the interest of many regulators and standard-setters,” said Sean Prince, Partner, Crowe. “And rightly so, they have the consumer and investor protection in mind.”
Given how new the digital assets market is, there is a lack of clarity regarding regulation and jurisdiction in some cases. This regulatory uncertainty poses risks to those engaging with them. Changes to the existing regulatory landscape could have large impacts on companies holding or otherwise engaging with digital assets.
Accounting for Digital Assets
While transacting on a blockchain removes some or all the intermediaries in traditional financial markets, the nature of such transactions involves a variety of third parties that companies must consider.
“When we think about accounting for digital assets, we have to look to existing GAAP and literature out there because there’s no current guidance,” said Caitlin Hahn, Audit and Assurance Senior Manager, Deloitte & Touche LLP. “We’re taking a lot of the existing literature and applying it to the facts and circumstances of what companies are doing with digital assets and stepping through getting to the right answer with the accounting treatment.”
There are some challenges with certain assertions and CPAs must think hard about and consider differently the following from typical accounting transactions, such as:
- Existence/reliance on blockchain,
- Rights and ownership/key control
- Valuation
The Role of Public Company Auditors
Auditors have experience evaluating books and records as part of the financial statement and ICFR audits. They will continue doing that same work while working with records housed on a blockchain system. Procedures to obtain evidence will be new and innovative like the underlying blockchain technology, but the auditor’s objective in evaluating those records will remain the same.
“When it comes to auditing digital assets and crypto activity, public company auditors have a very important role to play,” said Sledge. “Now, is auditing digital assets very different than auditing other assets or other transactions? Well, at one level, the auditing considerations are the same as auditing any other kinds of assets or transactions or technology. Public company auditors apply the same professional standards, PCAOB standards, when auditing a digital asset transaction as they do auditing non-digital asset transactions, and there are no particular auditing standards that are specific to digital assets.”
Visit the CAQ’s resource, Jumpstart Your Digital Assets Journey, A Resource for Audit Committee Members, to learn more.
