Accountants are back on the national stage in a way they haven’t been since the infamous Enron scandal . Is the profession faring better this time around, or is history just repeating itself? If you’re an entrepreneurial accountant, you should be personally offended by this scourge on the industry. Big names are cutting corners and the public view of the entire profession is suffering because of it. History may not be repeating itself, but accountants are not coming off any better for it either.
What is the FTX Scandal?
Earlier this month, the cryptocurrency exchange FTX filed for bankruptcy, despite starting the year off with an estimated value of $32 billion. The crypto exchange, which isn’t privately held and therefore not required to share its financial reports—announced on Nov. 11th that it had filed for Chapter 11 bankruptcy, ending an unbelievable period of growth. However, in a contradictory assessment, FTX states that it “successfully” underwent a US GAAP audit for 2021, ensuring that the crypto company’s financials were airtight.
Maybe we have different definitions of successful… But regardless FTX owes its investors an estimated $8 billion, and its financial reports are anything but solid.
"Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here"
That’s a statement from FTX’s new CEO, and if his name looks familiar, it should… He was the one credited with getting Enron through its own scandal. So, at least we can say FTX brought in the experts… But why did they need them in the first place?
“We believe the financial statements of FTX Trading Ltd. as of 12/31/21 were fairly stated and we stand behind our audit opinion,” Prager Metis CPAs LLC said in a statement to Bloomberg Tax.
Ah… that’s why. Because there was massive fraud across the board and no one wants to address it. Like with Enron, FTX intentionally misled shareholders to protect their profits with inaccurate and fraudulent accounting practices. FTX CEO Sam Bankman attributes the “mistaken accounting” to a mix-up between other entities in his crypto empire. But FTX couldn’t and didn’t commit massive fraud by themselves. They had a little help along the way….
Whose Fault Is It?
Clearly, FTX is at fault. There’s no doubt about that. But what about the accounting firms that verified that fraud? Armanino, one of the 20 biggest accounting practices by revenue, and Prager Metis, an up & coming firm specializing in digital assets are also to blame. Both firms reviewed and corroborated FTX’s 2021 financial reports, and both firms refuse to comment on the situation.
For their part, earlier in the year, Prager Metis published an article titled “The Anatomy of Fraud ” stating that companies should “evaluate internal controls, policies, procedures” to help lower the risk of fraud. Perhaps they should take their own advice. Or maybe they’re too busy maintaining their office in the Metaverse where fraud isn’t real? As for Armanino, they previously claimed they were one of the top firms in the US. We’ll have to wait and see if they still cling to that.
Read our full opinion on who’s to blame and why here.
In Defense of... Absolutely Nothing
Despite desperate attempts to “stand by” their work, it’s clear that Prager Metis and Armanino failed. Best case scenario, their reporting was simply inaccurate due to carelessness and company oversight. Worst case scenario, they intentionally mislead investors and committed massive fraud. We won’t beat around the bush, it’s fairly obvious what happened here, but the lines are still gray. And that’s because cryptocurrency is an emerging and underregulated genre. Perhaps this will spur lawmakers into action.
They’re Awfully Quiet Now…
Where is the AICPA? As the accounting industry’s guiding light, where is their guidance? One might reason that they don’t need to weigh in on the scandal in the first place. After all, the AICPA is not the judge & jury of the accounting industry. Why don’t we take a look at their “Purpose-in-action” page and find out exactly what they believe their responsibility to the profession is…
“Accounting professionals serve as capital market gatekeepers. Their skepticism, judgment, expertise and commitment to the public interest inform their work to audit, assure and report on the financial and non-financial information private and public companies, non-profits and governments produce.”
If as stated on their website, the AICPA expects accounting professionals to act as “capital market gatekeepers” with “ transparency and integrity” shouldn’t they have something to say when the exact opposite occurs? If their response to the Enron scandal is any indication of how they’ll react this time, it’s safe to say that they will stay silent for a calendar year and then launch an extensive marketing campaign aimed at rebuilding trust around the accounting profession.
At the end of the day, the AICPA is integral to establishing rules and setting standards for the entirety of the accounting profession. And just like you, they should be offended and outraged by what’s happened with FTX. Their silence says what their words won’t, they’ve overlooked issues of fraud before and they will do it again.
The Real Victims
Entrepreneurial accountants. You. At the end of the day, Armanino and Prager Metis will rebound. FTX is already under the careful supervision of financial fraud savor and new CEO John Ray. And it seems as though the AICPA will remain tight-lipped. The real victims are small accounting firms and local CPA practices. Because when the public looks at this industry in the news all they see is massive fraud. And as much as everyone involved (and the AICPA) wants to act like this was just a mistake, it’s obvious it wasn’t. The FTX scandal puts a bad face on accounting. Now, unfortunately, it’s your job to turn that perception around.
