Casey Wagner

Binance’s auditor spotted red flags in the exchange’s business practices years ago, newly filed evidence in the SEC’s suit against the exchange shows.&nbsp;



Armanino, Binance’s accounting firm, recommended the exchange stop commingling client and company funds in 2022, court declarations entered Wednesday show. The auditor made a variety of other suggestions based on “significant deficiencies” found in the business’ practices.



In a letter sent to BAM Management US Holdings in May 2022, accounting firm Armanino warned the company that keeping client and customer funds in the same bank account could create regulatory issues down the line.&nbsp;



“We still encourage management to fully segregate all customer assets from corporate assets as a best practice as we expect future potential regulatory requirements in this area,” Armanino wrote in the letter.



Accountants found “significant deficiencies,” across several of Binance’s divisions throughout 2019, including incorrect financial reporting, poor safeguarding of assets and insufficient custodian controls, according to a letter sent to BAM dated May 27, 2020.&nbsp;



Binance poorly handled data, Armanino said, and had “issues in data integrity,” court documents reveal. Armanino advised the company to provide more transparency around data collection and implement better processes to ensure accuracy.&nbsp;



Regarding safeguarding assets, the auditor took issue with who held bank access at Binance. “Susan (from Binance.com),” who was not a C-suite level employee, acted as the “approver of the company’s account,” court documents show.&nbsp;&nbsp;



In terms of custodian controls, Armanino suggested in 2020 that Binance “should periodically inquire and test the controls to ensure the processes at the custodian are functioning as intended and reliable.”&nbsp;



Armanino <a href="https://blockworks.co/news/ftx-nexo-auditor-armanino-to-quit-crypto-after-8-years-report">stopped working with all crypto clients</a>, including FTX.US and Kraken, in December 2022 after FTX’s bankruptcy and subsequent legal troubles. Armanino had previously worked with various crypto clients since 2014.&nbsp;



The SEC announced charges against Binance and related companies, including Binance.US, BAM Trading and BAM Management US Holdings on Monday. The regulator alleges the exchange commingled client assets with company funds and violated US securities laws.



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Auditor Armanino Said Binance Mixed Company, Client Funds in 2021

Ben Strack

As former popular proof-of-reserve audit firms Mazars Group and Armanino discard <a href="https://blockworks.co/news/ftx-auditor-proof-of-reserves" target="_blank" rel="noreferrer noopener">their crypto clients</a>, the industry is left wondering who might fill the gap in the space. According to Binance, none of the big firms are yet willing to step up. 



Mazars Group, which handled proof-of-reserves audits for exchanges KuCoin, Binance and Crypto.com, elected to stop providing the services because of “concerns regarding the way these reports are understood by the public,” according to <a href="https://www.cnbc.com/2022/12/16/mazars-suspends-all-work-with-crypto-clients-including-binance-cryptocom.html" target="_blank" rel="noreferrer noopener">reports</a>.&nbsp;



A Mazars spokesperson did not immediately return a request for comment.&nbsp;&nbsp;



The “Big Four” accounting firms — known to be Deloitte, Ernst &amp; Young, KPMG and PricewaterhouseCoopers — are “currently unwilling” to conduct a proof-of-reserves audit for a private crypto company, a Binance spokesperson told Blockworks.



Deloitte currently works with Coinbase, which went public via direct listing in 2021, for its auditing and accounting services. Ernst &amp; Young on Friday <a href="https://www.ey.com/en_gl/news/2022/12/ey-announces-alliance-with-taxbit-to-support-tax-reporting-requirements-for-digital-assets" target="_blank" rel="noreferrer noopener">revealed a partnership</a> with crypto tax and accounting technology provider TaxBit.



Spokespeople for the four companies did not immediately return requests for comment.&nbsp;



Mazars <a href="https://twitter.com/binance/status/1600468894191210496" target="_blank" rel="noreferrer noopener">published a report</a> on Binance’s proof of reserves last week as various exchanges sought to ease investor concerns following the crash of FTX. The report appears to have since been removed from the sites of Binance and Mazars. Read more: <a href="https://blockworks.co/news/what-are-proof-of-reserves-and-can-they-build-back-trust" target="_blank" rel="noreferrer noopener">What Is Proof of Reserves and Can It Build Back Trust?</a>



Binance also faced a “stress test” this week, a spokesperson noted, during which it fulfilled $6 billion of net withdrawals over a three-day span “without breaking stride.”



“That said, we embrace additional transparency and we are looking into how best to provide those details in the coming months,” the Binance spokesperson said.&nbsp;&nbsp;



The representative added that Binance would go forward with Merkle Tree proof of reserves efforts to show that its assets exist on the blockchain and are safely under the control of the exchange.



“The benefit of having the [proof of reserves] verified by an independent audit firm is that it can provide additional validation that exchange assets are equal to or greater than the exchange’s liabilities to its customers,” the Binance spokesperson told Blockworks. “We have reached out to multiple large firms…and we are still looking for a firm who will do so.”&nbsp;



<h3 class="wp-block-heading">Armanino says adios to proof-of-reserves</h3>



Armanino, the auditing firm for crypto companies such as FTX US and Kraken, is also <a href="https://blockworks.co/news/ftx-nexo-auditor-armanino-to-quit-crypto-after-8-years-report" target="_blank" rel="noreferrer noopener">set to exit</a> the crypto space, <a href="https://www.forbes.com/sites/emilymason/2022/12/15/ftx-accounting-firm-armanino-ends-crypto-audit-practice/?sh=54b386bd362f" target="_blank" rel="noreferrer noopener">Forbes reported</a> Thursday.&nbsp;



The company conducted a <a href="https://www.kraken.com/press/releases/kraken-launches-proof-of-reserves-audits-allowing-clients-to-verify-crypto-balances" target="_blank" rel="noreferrer noopener">proof-of-reserves audit</a> for Kraken in February, as well as <a href="https://blog.kraken.com/post/15002/kraken-proof-of-reserves-audit-expands-to-include-five-new-assets/" target="_blank" rel="noreferrer noopener">another</a> one for the crypto exchange in August — expanding its coverage beyond bitcoin and ether to include tether (USDT), USD Coin (USDC), ripple (XRP), cardano (ADA) and polkadot (DOT).



An Armanino spokesperson did not immediately return a request for comment.&nbsp;



Kraken has touted its efforts of proving reserves and liabilities, saying in a <a href="https://blog.kraken.com/post/16592/proof-of-reserves-or-proof-of-nothing-there-is-no-in-between/" target="_blank" rel="noreferrer noopener">Dec. 12 blog post</a> that certain transparency initiatives by other industry players have fallen short.



Thomas Perfumo, Kraken’s head of strategy, told Blockworks that the company planned to include additional assets in its future proof-of-reserves audits and publish such disclosures multiple times per year.



A representative did not immediately comment on how Kraken would proceed with such audits now that Armanino has reportedly halted its work in the sector.&nbsp;&nbsp;&nbsp;



Stablecoin issuers in the space are currently report working with traditional auditing firms.  Circle publishes its own monthly reserve report with attestations from Grant Thornton, the company <a href="https://www.circle.com/blog/new-levels-of-detail-in-the-monthly-usdc-attestation" target="_blank" rel="noreferrer noopener">said</a>. In August 2022, Tether hired Italian accounting firm BDO Italia to produce its monthly stablecoin reserve reports.



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As Crypto Auditors Call It Quits, What Will Take Their Place?

Shalini Nagarajan

Armanino, the auditing firm for a string of prominent crypto companies including FTX US, is said to be exiting the space after eight years.&nbsp;



The California-based auditor will quit crypto and give up its clientele, <a href="https://www.forbes.com/sites/emilymason/2022/12/15/ftx-accounting-firm-armanino-ends-crypto-audit-practice/?sh=54b386bd362f" target="_blank" rel="noreferrer noopener">Forbes reported</a> on Thursday, citing two sources familiar with the matter.



FTX, which frequently endorsed regulation and claimed its financials were <a href="https://twitter.com/SBF_FTX/status/1589399422555033600" target="_blank" rel="noreferrer noopener">audited</a>, hired Armanino to keep its US arm in check, having reportedly performed its 2020 and 2021 audits and found no glaring problems.



A separate accounting firm, Prager Metis, <a href="https://www.coindesk.com/business/2022/11/11/meet-the-metaverse-night-clubloving-audit-firm-that-presided-over-ftxs-financials/" target="_blank" rel="noreferrer noopener">worked</a> on FTX’s flagship global exchange headquartered in The Bahamas.



Armanino began servicing crypto clients in 2014 and had become one of the sector’s most well-known auditors. Crypto exchanges Kraken and <a href="http://gate.io" target="_blank" rel="noreferrer noopener">Gate.io</a>, as well as lenders Ledn and Nexo, were among its customers alongside FTX US (Nexo first <a href="https://nexo.io/blog/nexo-passes-real-time-armanino-audit-becomes-the-first-crypto-lender-to-shed-light-on-reserves" target="_blank" rel="noreferrer noopener">passed</a> Armanino&#8217;s &#8220;real-time audit&#8221; last September).



Armanino had spearheaded crypto exchange “proof of reserves” reports by launching a crypto holdings <a href="https://www.armanino.com/software/trustexplorer/proof-of-reserves/" target="_blank" rel="noreferrer noopener">assurance portal</a> in 2020, which allows users of certain platforms to confirm the status of their digital assets.&nbsp;



The reports have however faced criticism for relying on company-provided data and absent liabilities. 



Mazars, another auditing firm that supported proof of reserves for platforms including Binance and KuCoin, is also <a href="https://www.coindesk.com/business/2022/12/16/binance-proof-of-reserves-auditor-mazars-pauses-all-work-for-crypto-clients/" target="_blank" rel="noreferrer noopener">pulling</a> out of crypto.



<h3 class="wp-block-heading">Armanino named in class-action lawsuit with FTX CEO Bankman-Fried</h3>



Armanino is yet to address Forbes’ report, but the outlet suggested that its more traditional clients may be concerned about reputational risk in light of the FTX scandal. Blockworks has reached out for comment.



Without naming Prager Metis or Armanino, new FTX CEO John Ray <a href="https://www.bloomberg.com/news/articles/2022-11-17/ftx-s-advisers-have-found-just-a-fraction-of-company-s-crypto" target="_blank" rel="noreferrer noopener">said</a> in a bankruptcy court declaration that FTX&#8217;s former audits should not be trusted.&nbsp;



Ray added FTX’s record-keeping was so careless that advisers “have been unable to prepare a complete list of who worked for the FTX Group as of the petition date.”&nbsp;



Armanino was also <a href="https://www.courthousenews.com/wp-content/uploads/2022/11/FTX-class-action.pdf" target="_blank" rel="noreferrer noopener">sued</a> in a class-action filed last month with former FTX CEO Sam Bankman-Fried, Prager Matis, as well as FTX insiders Caroline Ellison and Gary Wang.&nbsp;



Plaintiffs claimed Armanino failed to meet its professional obligation to ensure FTX wasn’t engaged in malpractice. The firm was “wilfully blind” to FTX’s pattern of alleged racketeering, said investor Stephen Pierce, who lost about $20,000 in the exchange.



<a href="https://www.reuters.com/markets/currencies/exclusive-least-1-billion-client-funds-missing-failed-crypto-firm-ftx-sources-2022-11-12/" target="_blank" rel="noreferrer noopener">Reuters</a> reported that FTX had funnelled $10 billion in user funds to Alameda over the years via a secret software &#8220;backdoor.&#8221; This alleged backdoor allowed the smooth movement of funds without alerting third parties, like auditors.



Updated Dec. 16, 2022 at 2:16 pm ET: Added context, Nexo first passing Armanino&#8217;s &#8220;real-time audit.&#8221;



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