Calls for higher auditing frequency of South African crypto market

Regulators and auditors play an increasingly vital role in securing and validating the big data infrastructure of Virtual Asset Service Providers (VASPs) as crypto trading values are exceeding $35 million. This booming industry requires increasingly innovative auditing methodology that addresses the exponential growth and technicalities of big data.

Revenue recognition, and the segregation of corporate and customer wallet balances by backend systems are the main areas of concern

“The cryptocurrency industry is supported by big data, which is incredibly dynamic, variable and volatile. As audit partners, it demands that we maintain an unprecedented level of agility,” explained Dinesh Gurlal, Associate Director of IT Audit at leading audit, tax and advisory firm Mazars in South Africa during a webinar.

“Due to the scale of big data, we must go beyond traditional, annual or interim audits and adapt to meet the needs of an ever-evolving sector. To do this, we interrogate lower, manageable volumes of data on a more regular basis, using advanced analytics tools to sift through the intricacies.”

Gurlal identified two key risk areas that concern auditors of VASPs: revenue recognition, and the segregation of corporate and customer wallet balances by backend systems.

Within these risk areas, there are three areas of consideration; the validity, accuracy and completeness of transactions included in the accounting records that ultimately make up the line items in the income statement and balance sheet.

He argues that what keeps audit partners of cryptocurrency exchanges awake at night are issues around needing to gain sufficient audit evidence to mitigate the auditor’s risk to an acceptable level.

Speaking on behalf of the cryptocurrency exchanges, Richard Ball, lead data scientist at Luno explained that the challenges faced by the industry have necessitated an approach that, above everything, ensures the integrity of data.

Luno does this by employing bespoke methodology around database design and medallion architecture (or a layered approach to certain criteria), which segregates certain pieces of data according to its use cases.

“Some of the key challenges that we face as a business include the proficiency of users, the relevancy of the data, the growth of the data, the freshness of the data and the data analytics tool selection,” says Ball.

“As a cryptocurrency platform exchange, operating in an environment that is experiencing a boom, we are constantly adapting, iterating, and innovating in order to work within the parameters of existing regulation and take both reactive and proactive approaches to the new challenges that arise.”

“Luno is ISO27001 certified, which confirms that we have all of the necessary systems and processes in place to ensure the data and customer information we hold is safe.”

According to Wiehann Olivier, Partner and Digital Assets Lead at Mazars, the current status quo is characterised by a scenario where cryptocurrency, a new and emerging asset class – valued at around $1.7 trillion – is being retrofitted into existing rules and regulations that are not tailored to govern the unique way in which it operates.

“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 their name and reputation at risk, but they are also putting the audit profession and cryptocurrency industry at risk,” he says.

Cryptocurrencies do not readily fit into any existing accounting frameworks. While it is easy to assume that crypto can be classified as financial instruments under the relevant standard, they aren’t cash, and they aren’t equity of another entity and there is no contractual agreement, so one needs to look at other applications that make sense from a practical point of view.

Olivier says that we need to consider the tax implications of cryptocurrencies: “because once again we have this asset class that’s being dropped into pre-existing laws and regulations”.

The consensus was a call to increase auditing frequency while the regulations are put in place.

Read more: Luno data reveals the habits of the South African crypto buyer

Featured image by Tima Miroshnichenko/Pexels