What keeps cryptocurrency auditors up at night?


Today, South Africa stands among the top cryptocurrency trading nations on the continent. With local daily crypto asset exchange values ​​topping the $35 million mark, regulators and auditors are playing an increasingly crucial role in securing and validating the big data infrastructure on which s ‘support virtual asset service providers. This booming industry requires an audit methodology that goes beyond conventional ticking and bashing* and tackles the exponential growth and technical aspects of Big Data.

That’s the opinion of Dinesh Gurlal, associate director of IT audit at Mazars, a leading audit, tax and advisory firm in South Africa. “The cryptocurrency industry is underpinned by big data, which is incredibly dynamic, variable, and volatile. As audit partners, this demands that we maintain an unprecedented level of agility. he scale of big data requires us to go beyond traditional, annual or interim audits and adapt to meet the needs of an ever-changing industry by querying smaller, manageable volumes of data more regularly. , using advanced analytical tools to sift through the intricacies,” Gurlal explained during a webinar on crypto and digital assets hosted by South Africa’s Mazars and Luno, the world’s leading digital currency platform, Wednesday evening.

Gurlal explained that there are two main areas of risk that concern auditors of virtual asset service providers. These include revenue recognition and the separation of corporate and customer wallet balances by backend systems. Within these risk areas, there are three areas to consider; namely, the validity, accuracy and completeness of the transactions included in the accounting records that ultimately constitute the income statement and balance sheet items. Gurlal argues that what keeps audit partners of cryptocurrency exchanges awake at night are the issues of having to obtain enough audit evidence to mitigate auditor risk to a level. acceptable.

According to Wiehann Olivier, partner and head of digital assets at Mazars, the current status quo is characterized by a scenario in which cryptocurrency, a new emerging asset class – valued at around $1.7 trillion – is integrated into existing rules and regulations that are not adequate. govern the unique way it operates.

Uncharted territory requires in-depth knowledge from service providers

According to Olivier, this is why it is essential for crypto exchanges to use professional services firms – including auditing services – where there is a deep and evolving knowledge of this new technology.

“If an auditor does not understand the industry – the nature of the technology, its inner workings and how to obtain the relevant assurance – the auditor is not only putting his name and reputation at risk, he is also putting the profession of auditing and the risky cryptocurrency industry,” says Olivier. Since cryptocurrencies and digital assets are extremely broad and highly technical topics, this is no small feat.

As an example, Olivier says that cryptocurrencies such as Bitcoin and Ether operate on fundamentally different bases, which means that the differences in the nature of these two currencies require different approaches to aggregate and harvest transactions from different blockchains.

On top of that, Olivier says proving rights and ownership isn’t as easy as getting third-party confirmation from the bank, because blockchain and cryptocurrencies were designed to work without an intermediary. “So we have to design procedures to provide us with the required assurance, which differs for each of the different existing cryptocurrencies,” Olivier explains.

Olivier notes the question of the classification of these digital assets. “Cryptocurrencies do not fit easily into existing accounting frameworks. One would imagine that they would be classified as financial instruments under the relevant standard, but they are not – they are not cash, and they are not equity of another entity and there is has no contractual agreement, so you have to look at other possible applications that make sense from a practical point of view,” he explains.

Finally, Olivier says that we have to consider the tax implications of cryptocurrencies: “because once again we have this asset class that is abandoned in pre-existing laws and regulations”.

Data integrity first

Richard Ball, Senior Data Scientist at Luno, provided a practical perspective, who explained that the challenges facing the industry have required an approach that, above all, ensures data integrity. Luno achieves this by using a bespoke methodology around database design and inset architecture (or a layered approach to some criteria), which segregates certain data based on its use cases.

As he concludes, “Some of the key challenges we face as a business include user proficiency, data relevance, data growth, data freshness, and selection of data analysis tools. As a cryptocurrency exchange, operating in a fast-paced environment, we are constantly adapting, iterating and innovating to work within the parameters of existing regulations and adopt approaches that are both responsive and proactive in the face of new challenges. Luno is also ISO27001 certified, confirming that we have all necessary systems and processes in place to ensure the security of the data and customer information we hold.

Dinesh Gurlal, Associate Director of IT Audit at Mazars, a leading audit, tax and advisory firm in South Africa.


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