Will PwC’s New Software Solve the Cryptocurrency Auditing Problem?

Published at: June 22, 2019

Earlier this week, Big Four firm PwC announced the release of a cryptocurrency auditing software solution.

According to the multinational professional services network, its Halo auditing suite has now been updated to accommodate “entities engaging in cryptocurrency transactions.” The new tool reportedly allows PwC to establish crypto asset ownership and gather information about transactions and balances from blockchains.

While it is currently unclear whether Halo will now be picked up by cryptocurrency-related businesses, PwC’s move seems to mark another landmark step for the industry.

Specifics of auditing in the crypto space

Auditing in the crypto space is still a developing practice that varies substantially between stakeholders, as Maurizio Raffone, founder and CEO of Finetiq, told Cointelegraph. He also drew a parallel between on-chain and off-chain audits, explaining:

“On one side, crypto exchanges have historically focused on cyber-security measures, processes and procedures dealing with corporate governance and so forth, just like most other businesses. There are then on-chain audits that tend to focus on checking for bugs and correct workflow of a blockchain protocol or, more often, smart contracts.”

Indeed, the Association of Chartered Certified Accountants (ACCA) — a global body for professional accountants — believes that “robust and consistent” accounting treatment is required for different types of cryptocurrencies, as Narayanan Vaidyanathan, head of business insights at ACCA, told Cointelegraph via email:

“This is currently an on-going challenge that is still under deliberation within the accountancy profession. Is a crypto currency cash, inventory, a financial asset, or an intangible asset? Because if there are accounting issues, it therefore as a downstream implication also becomes an audit issue.”

Auditing services might also depend on how companies utilize cryptocurrencies, adds David Martin, chief investment officer at Blockforce Capital:

“It is important to differentiate how a firm is using digital assets in its business dealings. For instance, a company that uses cryptocurrency as a way to make transactions requires different services than an investment firm that is holding digital assets as a form of investment.”

Perhaps the most notable example here would be Tether, the company behind the eponymous stablecoin (USDT) and a wholly owned subsidiary of iFinex — which also owns crypto exchange Bitfinex.

In early 2018, Tether’s plans to release a third-party audit fell through, although the company had previously announced that it was undergoing a “balance sheet audit” by Friedman LLP, a New York-based accounting firm.

However, in late June 2018, a document was finally produced — although it turned out to be a memorandum rather than an audit performed by an auditing company. As Tether’s general counsel explained at the time, mainstream accounting firms would not conduct official audits on companies working with cryptocurrencies.

While it is unclear whether Tether was willing to provide all the required information to third-party auditors (which could be the reason it could not complete the inspection), the general problem seems to persist within the crypto industry. Ben Tsai, president and managing partner of Wave Financial, told Cointelegraph:

“Cryptocurrency companies definitely have an audit problem. Major players such as exchanges, stablecoins and hedge funds are not consistently providing proof of solvency despite the fact they need to.”

According to experts, the regulatory uncertainty within the space might be part of the issue. As Tsai told Cointelegraph, the current regulatory climate allows crypto businesses to turn to auditing firm only in case of emergency:

“Regulation does not currently require ‘proof of funds’ for stablecoins and for exchanges, which is the main reason these audits aren’t taking place. Mostly, the big four come in and audit companies after they ‘mess up.’”

Indeed, as Martin opines, cryptocurrencies remain in “a precarious situation” in regard to regulation:

“Regulatory systems are primarily reactive and laws haven’t necessarily caught up to the innovation of digital assets quite yet. The financial reporting standards in the US which are set by GAAP (Generally Accepted Accounting Principles) don’t currently directly address the accounting for cryptocurrencies. Nuances like this make auditing business activities involving digital assets and cryptocurrencies inherently difficult.”

The Big Four’s relationship with cryptocurrencies

The Big Four is a commonly accepted term used to refer to the four biggest auditing firms in the world: Ernst & Young (EY), PwC, Deloitte and KPMG. Handling the vast majority of audits for companies around the world, both private and public, they are considered a cornerstone of the mainstream financial world.

Notably, during the past few years, the Big Four have been showing particular interest in the crypto industry. However, all of the major auditors have established long-term blockchain roadmaps to remain relevant in the space.

PwC has arguably been the most active Big Four company when it comes to cryptocurrencies. It started accepting bitcoin (BTC) for its services back in 2017 and announced a training program to enhance its employees’ blockchain knowledge in the following year.

Further, PwC has also recognized the regulatory uncertainty, naming it one of the main obstacles on the road to mass blockchain adoption in its 2018 report entitled “Blockchain is here. What’s your next move?” The Big Four giant had also pinpointed the lack of insurance as another problem hindering crypto businesses in a separate interview with Reutres.

Moreover, PwC has not only recognized the importance of the field, but has started to explore it firsthand. First, in May 2018, the auditing firm invested in VeChain, a major cryptocurrency project specializing in the Internet of Things (IoT), supply chain management and anti-counterfeiting.

In March 2019, PwC began conducting a trial of its blockchain-powered platform for ensuring the integrity of employee credentials. By the end of the same month, the company had become the top recruiter for blockchain-related jobs on headhunting platform Indeed, being responsible for as many as 40 blockchain-related job offers there (EY had 17, Deloitte had 10, while KPMG didn’t have any offers). PwC had 400 blockchain experts on board in 2018 to cater to cryptocurrency-related clients, according to the Financial Times, while this number could be higher at this point.

“We are devoting significant resources to how we might provide audit services in not just cryptocurrency, but blockchain,” a PwC representative told the publication at the time.

However, PwC wasn’t the first Big Four venture to adjust its auditing tools for the needs of cryptocurrency companies. In that sense, it has been outraced by the competing EY, which rolled out its blockchain analytics program called “Blockchain Analyzer” in April 2018.

So, can PwC’s new solution outshine its rivals in the crypto space and will it actually have an impact on the industry at all?

Details about the new version of Halo

As PwC stated in the press release, the tool newly added to its Halo auditing suite can be used to “provide assurance services for entities engaging in cryptocurrency transactions.”

The firm claims that, after the update, the Halo suite permits PwC to provide independent evidence of private-public key pairing, which is used to establish crypto asset ownership.

“Proof of ownership is really the main blocking point,” notes Tsai of Wave Financial. He told Cointelegraph:

“We had a California state auditor come into the office who struggled to grasp what ‘ownership’ of cryptocurrencies looks like. Auditors are used to custodial statements, paperwork and other forms of ‘proof’. With the blockchain, only your private key proves ownership, which makes it difficult to show ownership without exerting control over the funds (moving them around, etc.).”

Therefore, if Halo can actually prove ownership of funds and auditors can trust the tool, it would “speed up audits and cut costs and headaches,” Tsai concluded.

Raffone also argued that Halo might prove to be efficient, given that it focuses on a specific on-chain audit niche:

“This is a useful tool for sure, focused on transactional history and balances which seems suitable for institutional investors and fund managers, entities that normally require audits relating to financial transactions and assets ownership.”

Further, PwC’s Halo can now reportedly gather information about transactions and balances from blockchains. That, according to Martin of Blockforce Capital, is also a potentially effective feature.

“The Halo platform offers an easy-to-use way for firms to access blockchain information without having to spend manpower and resources that could be better spent somewhere else,” Martin told Cointelegraph, elaborating:

“For instance, the Bitcoin blockchain is open-source and can be viewed by anyone. However, just because the information is available doesn’t mean it doesn’t require a unique skill set to access.”

According to PwC, the upgraded version of the Halo suite is already being employed to support audits of clients involved with cryptocurrencies and assisting companies for which the firm is not the auditor in implementing processes and controls necessary to obtain assurance reports from their auditors. Theoretically, that could ease cryptocurrency-related audits not only for PwC, but the industry at large.

Still, the Big Four firm notes that the tool has its limitations: namely, client’s control environment, and, “at this stage,” the breadth of tokens supported by Halo. The software reportedly supports bitcoin (BTC), bitcoin cash (BCH), bitcoin gold (BTG), bitcoin diamond (BCD), litecoin (LTC), ether (ETH), OAX (ERC-20 token) and XRP.

“These considerations will be key when determining whether we are comfortable to accept an audit engagement,” PwC wrote in the press release.

It is currently unclear whether Halo is deployable in all 158 countries that PwC claims to be operating in. Cointelegraph has reached out to the Big Four company to clarify this, but has not heard back as of publication.

Experts suggest that the vast geography should not be a problem for Halo, however. ACCA’s Vaidyanathan reminded that the international auditing standards (ISAs) apply globally when asked about potential clashes.

Raffone of Finetiq, in turn, stressed the technical nature of PwC’s solution:

“The audit function provided by Halo is purely technical and doesn’t seem driven by any regulatory requirement, therefore it seems a ‘upon request’ service that can be deployed across jurisdictions. Although I don’t think Halo fills any regulatory need per se currently, it is certainly comparable to similar investment fund audit services and once the crypto industry becomes mainstream, I would expect this sort of audit service to be required by regulators.”

Martin maintains a similar position. According to the Blockforce Capital’s CIO, PwC should be well-poised to take on the regulatory complexities, given its experience with running auditing and accounting practices in multiple countries:

“While adjusting to different jurisdictions is difficult, PwC is in a great position to take on the task. They are a highly respected accounting firm and have the resources to apply to such an endeavor.”

Do things get better as we go along?

In the end, the problem seems to come down to the aspect of adoption: While the cryptocurrency industry continues to grow, the recognition from mainstream corporations — such as the Big Four — could speed up this process. That is why PwC's work with Halo is “validating” the institutionalization of the crypto space, in Tsai’s view.

On the other hand, the need for crypto-specific audits could be fulfilled even without the participation PwC, Deloitte and others, according to what Raffone told Cointelegraph:

“A whole host of specialist firms are emerging as leading crypto audit service providers, challenging the Big Four and their cost structure. Even IBM is getting in the game with a recently patented solution to audit blockchains.”

While time will tell if Halo turns out to be a viable solution for the crypto space, the remaining Big Four players have now been challenged to release their own software that would be on par with Halo in terms of functionality.