Innovations such as distributed ledger technology can be the ally of businesses and financial reporting activities, according to SEC Chief Accountant Wesley Bricker, but companies must maintain appropriate books and records regardless of whether distributed ledger technology, smart contracts, and other technology-driven applications are used. Further, the auditor of an issuer, broker-dealer, or investment adviser is still required to determine the nature and extent of the audit procedures to perform based on the circumstances of the entity and the auditing standards applied, he noted in remarks at the AICPA national conference on banks and savings institutions.
Bricker urged companies and their auditors to stay abreast of innovations in distributed ledger technology and digital assets, then continue to meet the existing requirements of the federal securities laws, such as those relating to books and records, internal accounting controls, internal control over financial reporting, and custody. Distributed ledger technology and digital assets do not alter these fundamental responsibilities, he emphasized.
Before undertaking digital asset activities, Bricker said, companies should consider their policies and the expertise of their accounting staff to support the preparedness for compliance with the federal securities laws. This includes making and keeping detailed and accurate books, records, and accounts, along with related internal accounting controls to record such transactions or balances, he noted.
Books and records. Bricker reminded companies and auditors that maintaining complete and accurate books and records, along with the related internal accounting controls, is a regulatory requirement. Management and others should understand these requirements, he said, and play a role in helping to prevent, detect, and deter mischief in the capital markets.
With regard to fair value measurement and related party disclosures, he noted that transactions in digital assets on distributed ledgers can be public, but the identification of the owners and recipients of the transactions generally are not. Instead, they are associated with alphanumeric codes known as "public keys," which provide for a high degree of anonymity, he said.
Identification of related parties. Bricker pointed out that the identification of related parties, transactions with related parties, and any resulting balances is necessary for purposes of preparing disclosures required by Regulation S-X, GAAP, and IFRS. He noted, for example, that a fair value measurement assumes that the asset is exchanged between market participants, who are buyers and sellers who are independent of the reporting entity.
Digital asset developers sometimes "pre-mine" or accumulate a given digital asset and therefore hold an overwhelming concentration of the digital assets, Bricker said. The digital assets can later make their way to market, with an effect on the supply and demand for the digital asset, and impact the prevailing price. Consequently, the identification of related parties, their transactions, and balances can be useful disclosures for investors to receive, he said.
Bricker reiterated that auditors function as critical gatekeepers in the area of issuer reporting and disclosure. In his view, in circumstances where a company has digital asset holdings or transactions, external auditors need to consider their ability to carry out their professional responsibilities in connection with digital assets during their client acceptance and continuance processes.
He noted that auditors have a long-standing obligation to deal with potential illegal acts that have a direct and material effect on the determination of the financial statement amounts. These potential illegal acts may arise from violations under the federal securities laws in connection with digital asset activities, he said.
Audit committees. Bricker also addressed the role of audit committees, including their responsibility to select and retain an external auditor. He encouraged audit committees to review an auditor’s qualifications, including access to legal and technology specialists in the area of digital assets. He also recommended that audit committees consider information about the audit firm’s regulatory and litigation experience, including concerning audits of companies with digital assets.
He believes audit committees should develop expectations for communications regarding information to be provided to the audit firm, such as analyses of compliance with laws and regulations, and should consider the impact of circumstances in which an auditor declines or is unable to issue an audit report with an unqualified audit opinion.
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