This article was written by Appold on 27 August 2024.
The number of companies holding or transacting in digital assets continues to grow rapidly. A 2023 report showed that 65% of institutional investors expected to buy digital assets in the coming years¹. In addition, at Appold, we have observed an increase in enquiries from a range of businesses and corporations exploring and adopting their use for a variety of reasons.
The incorporation of digital assets into business models is no longer limited to blockchain-native companies. An increasing number of non-blockchain-native industries are utilising digital assets for varying reasons. These range from diversifying treasury holdings and alternative sector investments through to making and receiving faster, more cost-effective cross-border payments. This has left audit firms with a vital role in ensuring compliance, trust, and credibility in digital asset business operations.
The importance of conducting thorough and transparent digital asset audits cannot be overstated, as the collapse of FTX in 2022 can attest. The question then arises: Should audit firms handle these audits alone, or is there greater value in partnering with independent blockchain and digital asset specialists? Our view is clear. Collaborative efforts between audit firms and independent digital asset experts fielding two sets of expertise yield the benefits of financial proficiency and industry-specific know-how.
This can overcome the unique challenges and knowledge gaps that auditors engaging with digital asset audits have faced in the past. However, the benefit is not just meeting strict standards; it also allows the companies being audited to demonstrate their ability to meet higher governance, risk, and compliance (GRC) standards with their clients, stakeholders, and regulators.
The importance of expert knowledge to digital asset audits
Traditional audit firms undoubtedly bring years of cross-industry experience and specialised knowledge in areas such as finance and accounting. However, the swift growth of the digital assets industry, combined with the technical complexities of innovation and change, can leave many auditors lacking the capabilities required to interpret and evaluate areas such as systems, controls and governance when contextualised by digital assets.
An audit involving digital assets requires specialised activities, such as on-chain reconciliation, asset ownership verification, and analysis of complex policies and protocols that are atypical of processes auditors are familiar with. An effective audit must also recognise potential pitfalls and mitigate security vulnerabilities effectively, for which independent blockchain specialists with firsthand technical experience can offer particularly valuable insights. Separating these functions the areas of coverage involve:
High-level separation of duties
In the capacity of an Auditor’s Expert, the Blockchain Specialist reports their findings to the Auditor only. This allows the Auditor to complete a full and thorough audit, enabling them to sign off the audit and make any associated recommendations.
Restrictions of an Auditor’s Expert
Under the rules governing independence in the UK, neither an auditor nor an auditor’s expert can implement post-audit recommendations due to the requirements to maintain independence, avoid self-review threats and ensure that management responsibilities remain with the audited entity’s management. The Auditor’s role is to provide an independent and objective opinion on the financial statements, not to engage in management activities. In the UK, the rules governing auditor independence are primarily outlined in the Financial Reporting Council’s (FRC) Ethical Standard, which sets out the requirements for auditors to maintain independence and avoid conflicts of interest.
A Recent Case Study
To give a real-world example, Appold recently acted as an Auditor’s Expert in the financial audit of a leading global digital asset exchange. By leveraging Appold’s technical expertise alongside the Auditor’s financial proficiency, a complete Audit was undertaken, which included reviewing the IT controls, asset tracing, and transaction validation.
As part of this work, Appold was required to undertake a comprehensive and bespoke blockchain audit of the exchange. This included:
- Reviewing IT controls in the context of the entity’s substantial holding of digital assets.
- Assessing governance and verification of assets procedures
- Revenue generation verification
- On-chain transaction validation.
- Internal systems to blockchain reconciliation testing
- Platform AML and KYC compliance checks.
This partnership with an established audit firm allowed the work to be completed within a shorter timeframe, and with greater technical assurances given to the exchange and Auditor than could be expected without the partnership.
Of course, integrating digital assets into business operations offers numerous benefits to countless companies and industries, but realising these benefits requires rigorous, industry-specific audits. By partnering with independent specialists, audit firms can provide superior audit services that combine traditional auditing expertise with first-hand knowledge of blockchain and digital assets. Such a partnership can ensure comprehensive and accurate evaluations and set new standards for governance, accountability, integrity, and transparency in the digital assets industry.
From a digital asset industry perspective, audits are crucial to maintaining confidence in the sector and ensuring its long-term health and sustainability. However, it is equally essential that the audit processes are tailored to the industry itself through partnerships with industry experts to ensure they are performed efficiently, reliably, and confidently.
About Appold
Recently, Appold, an independent blockchain advisory and technology company, and Gravita, a full-service accountancy and audit firm, announced a partnership to provide specialist audit services for blockchain-related companies and digital asset holders. The partnership was formed to address the increased use of blockchain by native and non-native companies, the ongoing complexities faced during audits, and the fact that many auditors are still unprepared to enter the market.
For further details, please contact Appold on info@appold.com.
