‘Audit considerations for digital assets can be extremely complex’

With technology evolving so quickly, global regulatory standards do not yet capture all crypto offerings (Getty Images/ Sean Gladwell)

The emergence of digital assets over the past few years has transformed many aspects of the way institutions do business, including reporting. At the same time, it has heightened the need for regulations and other guideposts for those participating in the digital assets market.

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We asked Ryan Leopold, CPA, national banking and capital markets assurance leader (Canada) for PwC, to share his perspective on the challenges presented by digital assets and the progress on standards. Leopold is a member of the CPA Canada Crypto Asset Auditing Working Group, which works in collaboration with the American Institute of Certified Public Accountants (AICPA).

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CPA CANADA: What are the various forms of digital assets?
RL: Digital assets come in many shapes and sizes. The term crypto assets refers to a digital store of value or medium of exchange stored on the blockchain and verified cryptographically. Examples would include Bitcoin, Ether, Ripple and Litecoin.

Stablecoins are designed to offer price stability or a store of value by pegging their price to a more stable asset such as the U.S. dollar (the most popular).

Non-fungible tokens (NFTs) are a specific type of crypto asset that represents ownership of a unique digital asset, such as photography, digital art, trading cards, tickets, avatars, etc.

Security tokens are issues on distributed ledger technology that meet the definition of a security or financial instrument such as stocks or bonds.

Then there are central bank digital currencies or CBDC, which are digital tokens representing a nation’s flat currency and acting as a claim against its central bank. The Bank of Canada has been exploring the possibility of issuing a CDBC, and recently conducted a survey allowing Canadians to provide their feedback on this topic.

CPA CANADA: What is the focus of your working groups?
RL: I’ve been a member of the CPA Canada crypto asset working group since day 1. The purpose of the group is to advance the discussion of audit issues arising from emerging blockchain and crypto assets technology. We have great representation from other audit firms, CPAB, AASB and CPA Canada. Crypto assets and blockchain touch on multiple aspects of business and accounting, and audit and assurance, and therefore diverse experiences and perspectives are instrumental to our discussions. Our purpose is to examine the most pervasive and complex issues facing the audit sector at this time. The conversations encompass such issues as tests of controls, use of third-party service providers, relevance and reliability of information obtained from a public blockchain, and considerations when auditing companies with crypto mining revenue.

Since digital assets can be purchased and sold in most countries, regulations permitting, it is important that we form common views that reflect the nature of the assets and needs of the capital markets. We collaborate with the AICPA working group to share ideas and provide feedback on an ongoing basis.

CPA CANADA: What is the top challenge faced by digital asset financial statement issuers and auditors?
RL: There is a long list of challenges in this field.

Audit considerations can be extremely complex. For example, specific audit procedures for crypto assets will vary depending on the nature of the assets, the investment method, custody arrangements (self or third party), transaction type and regulatory requirements.

Common challenges when auditing crypto assets include understanding and evaluating controls over access to digital keys, reconciliations to the blockchain to verify existence of assets, considerations around service providers in terms of qualifications, availability and scope, and forms of reporting, among others.

As the technology is rapidly evolving, the regulatory standards do not yet capture all crypto offerings. Everyone is operating in an uncertain regulatory environment, where the speed of change is significant for all participants.

If you take accounting standards, for example, a common discussion today is how to measure these assets. Under IFRS, crypto assets are generally recognized as an intangible asset and recorded at cost. While this aligns with the technical requirements of the standards, it sometimes generates financial reporting that may not be well understood by users of the financial information who may be looking for the fair value of these assets.

Ryan Leopold, CPA (Image provided)

CPA CANADA: What is happening on the standards front?
RL: We are seeing standard setters take some initial steps in adapting to this environment. For example, the Financial Accounting Standards Board (FASB), the U.S. accounting standard setter, is exploring fair value accounting for crypto assets. Under International Financial Reporting Standards (IFRS), issuers can measure intangible assets at cost and assess for impairment which is recorded in P&L. However, if the issuer decides to remeasure the asset, any increase in fair value must go through other comprehensive income (OCI) and not P&L.

Every country has its own securities and capital markets regulatory landscape. While standards are evolving, , it is clear that regulators expect all participants in the crypto ecosystem to demonstrate a strong commitment to developing a robust control environment covering everything from financial controls to regulatory compliance.

CPA CANADA: Where can CPAs find out more?
RL: There is a wide range of educational resources on the CPA Canada site. CPAs can also access publications by various workings groups.

The Canadian Public Accountability Board (CPAB) has also published guidance on auditing in the crypto-asset sector that can be helpful.

Also, the Public Company Accounting Oversight Board (PCAOB) has issued publications for auditors pertaining to its standards and rules.

CPA CANADA: Will crypto assets survive the recent upheavals?
RL: Despite the headlines in the press, the underlying blockchain technology still has tremendous potential. It is important to keep in mind that blockchain-based assets go well beyond Bitcoin and Ethereum. For example, as mentioned earlier, the Bank of Canada is currently exploring the possibility of issuing a digital Canadian dollar.

However, it has become increasingly clear that it must be surrounded by the appropriate safeguards, controls, and a clear regulatory framework, much of which is being discussed in the current working groups.

The CPA’s role in this area remains important as our profession is in a unique place to provide the trust that organizations need more than ever.

MORE ON BLOCKCHAIN AND CRYPTO

For an overview of what we know—and don’t know—about the tax implications around crypto in Canada today, see Tax issues in cryptocurrency: an expert’s view.