French accounting firm Mazars is pausing all its work with crypto firms | Hacker News Reader

French accounting firm Mazars is pausing all its work with crypto firms

finance.yahoo.com

124 pointsfirstSpeaker47 comments

Too little too late. Their work with Binance was non sensical. It’s not a crypto issue, it’s to emit such claims without actually a proper audit is ridiculous. Even with all the proper reserves and small prints, it’s still a true lack of integrity to have even entertain the claim.

Mazars was the audit firm for the Trump Organization until February...

> Mazars has since deleted all crypto reports from its website.

Are those reports something an accounting firm is supposed to either stand behind or formally retract?

Does removing the reports constitute a retraction, or is it normal when a business relationship ends, or is it improper?

From what I gather, they could be on the hook during bankruptcy proceedings if they said everything was a-ok when it actually wasn’t. Exiting the space should shield them from that.

Why would it shield them from something they already did?

Makes sense. There’s no need to use this to read into the solvency of Binance. From Mazars’ perspective, the small amount of fees they receive is not worth the destruction of the rest of their business.

Arthur Andersen used to be one of the big accounting firms (the “big four” used to be the “big five” accounting firms) and their association with Enron and Worldcom destroyed their business. There’s no need to force an error by performing these incredibly narrow-scope exercises when the whole world is looking.

From experience working with Mazars, they are perfectly capable of destroying their business without the aid of crypto.

This was the same firm that stood behind the now convicted Trump organization's financial statements.

> their association with Enron and Worldcom destroyed their business

It wasn’t so much the “association” as it was the massive criminal conspiracy they were convicted of.

> the massive criminal conspiracy they were convicted of

Not disagreeing with the sentiment, but the conviction was unanimously overturned by the Supreme Court.

https://en.m.wikipedia.org/wiki/Arthur_Andersen_LLP_v._Unite...

As noted in the Wiki article, it was overturned essentially on procedural grounds based on how the jury was instructed. The government could have retried the case with the higher burden of proving willful misconduct by Andersen but by that point the firm was already dead from reputational damage, so I suppose justice was served anyway.

“During the fall of Enron, Arthur Andersen, Enron's accounting firm, instructed its employees to destroy documents relating to Enron after Andersen officials learned they would soon be investigated by the Securities and Exchange Commission.”

On that alone I’m surprised how it was unanimous on over turn for the Supreme Court. Obviously the documents did not show them in a good light.

The role of appellate courts is generally not to judge the facts of the case, but to judge whether the law has been applied correctly.

If you got convicted because the prosecutor and the trial judge didn't know what the law was, that's not right. That's what the Supreme Court decision here was about, not about whether or not Arthur Andersen had committed a crime.

In many cases, having your verdict overturned doesn't preclude the prosecutor from trying the case again.

Another botched case by the liberal hero Andrew Weismann.

If these crypto firms (especially Binance) collapse I can’t imagine surreptitiously deleting their audit reports in middle of the night will allow them to escape unscathed.

It's ironic that crypto exchanges need to use accounting firms for audits when the whole point of a blockchain is to account for things.

It's because internal exchange transactions are not on-chain. When you deposit crypto to a typical exchange, it sits in a hot wallet or gets moved to cold storage. Any further transactions you make on the platform, such as exchanging currency, just shift around balances on a regular database. Only when you withdraw does it show on the chain. This is not a crypto problem.

There's no technical reason why internal accounting systems didn't post to a Blockchain based ledger.

However most companies don't build their own accounting systems, it's too much of a liability and good luck getting an auditor to sign off on financials from something homegrown.

And I not even sure if a commercial off the shelf blockchain-based accounting system exists, does one?

> There's no technical reason why internal accounting systems didn't post to a Blockchain based ledger.

I agree. Using the main chain obviously costs network fees, which for the high amount of transactions involved in running an exchange is untenable. However, there's no reason an exchange couldn't use its own public blockchain to allow independent auditing.

> And I not even sure if a commercial off the shelf blockchain-based accounting system exists, does one?

Not to my knowledge, and I know some crypto projects would love to use a product like this. Could be worth doing some market research.

There is one market where I see a need for this, and it's OSS where transparency is important for building trust.

However, what's holding any company back from releasing a read-only connection to their live financial systems?

There are Ethereum rollups which basically work like that. There is a 7 day window to post a fraud proof.

A cursory search of zk rollups and decentralized exchanges brings up https://blog.kyber.network/zkyber-a-new-dex-trading-experien...

Any experience with them? I'd be curious to see how it holds up in practice.

There's a huge disconnect between the technical execution of blockchain or crypto exchange, and running a business with proper internal controls.

I have no ideas what that means, but the time period for legal discovery is usually around 7 years.

Mazars is the same firm that disclaimed all their audits of the Trump Org the minute they were investigated. Their reputation is in tatters in an industry built on reputation.

Doubt it. In 2008 lots of rating agencies made terrible judgment calls about the subprime crisis. We were upset and there was lots of talk about how this was so terrible for their reputation. A couple of weeks later everyone went back to business as usual.

https://en.wikipedia.org/wiki/Credit_rating_agencies_and_the...

Its reputation for focusing utterly on just what it is being paid to do seems to be growing stronger every day.

Related ongoing thread:

Binance outflows hit $6B as Mazars halts ‘proof of reserves’ work - https://news.ycombinator.com/item?id=34028921 - Dec 2022 (218 comments)

It's worth noting that that this is the same accounting firm which earlier this year retracted 9 years of "statements of financial condition" that they had prepared for The Trump Organization.[1]. The Trump Organization was found guilty of financial fraud earlier this month.[2]. These same Mazar statements are also at the center of another ongoing fraud case being brought by an Attorney General.[3]

[1] https://www.nytimes.com/2022/02/14/nyregion/mazars-trump-org...

[2] https://www.nytimes.com/live/2022/12/06/nyregion/trump-organ...

[3] https://www.nytimes.com/2022/09/21/nyregion/trump-fraud-laws...

It's a pity. Proper audits would be a boon for honest crypto exchanges and it would be an opportunity for accountants to show they can actually add value after all the scandals of the last 30 years...

> Proper audits would be a boon for honest crypto exchanges...

Correct!

Ask yourself if "audits are impossible" is the likely answer to their rarity.

Exactly. There's no such thing as a proper audit for crypto.

Perhaps it could be invented, but no one has.

I doubt the will to do it exists, since that would seem to be against the interests of all the big crypto players.

> There's no such thing as a proper audit for crypto.

No, this is absolutely the wrong take.

Crypto isn't special. It can be audited, and nothing has to be invented. Coinbase has audit reports.

What? In fact, crypto is the easiest thing to audit - require the person that claims to own a wallet to sign a challenge you provide with the public key, and check if the signature matches with your challenge and the public key of the wallet and the wallet's balance from the public blockchain matches the claim of the auditee. And you can completely automate this without having to involve a third party like a bank.

The likely challenge for the shadier exchanges it the “ok, but what have you used these coins you demonstrably possess as collateral for?”

Having $10B in crypto is easy to audit. Finding out $20B is owed is where it gets exciting, FTX-style.

Not to mention, the risks tied to the coins itself. FTX was also fully backed, on paper. The problem was just that their reserves were in their own fantasy money, which lost all of its value the moment FTX got into trouble. (And how the real dollars that people had deposited somehow turned into fantasy money is the magic trick that brought SBF free lodging in the Bahamian jail)

So an audit wouldn't just have to prove the assets are there on some chain, it would also have to verify the chain itself is actually suitable as a reserve.

> require the person that claims to own a wallet to sign a challenge you provide with the public key

That takes care of the assets ... now the liabilities

> honest crypto exchanges

I am reminded of Diogenes walking the streets of Corinth during the day with a lantern, looking for an honest man.

The only one I would expect to be somewhat honest is coinbase, on account of the mandatory SEC filings and actual audits (vs attestations) but Enron, MCI, Tyco, and many other companies had the same oversight, so I’m still skeptical about coinbase being honest.

The crypto companies don’t allow real audits. They just do “attestations” where the company can arrange things beforehand to look the way they want and doesn’t allow the accountant to dig behind the presented numbers

As soon as one does, others will have to follow. And right now, accounting companies don't do real audits either (hence Enron and WorldCom and dozens of other examples).

This is an opportunity for both of them to up their games.

Well, no one is stopping them...

if all relevant business transactions and arrangements are properly logged, what more is there to do than algorithmically digest these records and produce a result?

i'm trying to understand what the necessary human element is in the operation of accounting firms.

i imagine there are strategic aspects, i.e. how to categorize and structure future transactions?

the first pass is usually an algorithmic digest. the human element is required to recognize a subset of all transactions as requiring further analysis. some transactions require special consideration in either tax or reporting contexts. if every accounting system were a relational database, and every entry had multiple foreign keys to every appropriate classification, we could virtually eliminate CPA's. as it stands each accounting system is bespoke and idiosyncratic. some of them record transactions on sheets of paper.

source: dating a CPA

> if every accounting system were a relational database, and every entry had multiple foreign keys to every appropriate classification, we could virtually eliminate CPA's.

i'd like to hear it confirmed from additional sources but this is what i suspected.

i also imagine those with the necessary skills to formalise these practices are (understandably) not eager to automate themselves out of the value capture loop.

There’s off-chain stuff happening. They use their holdings as collateral on riskier investments, like the commercial paper holdings Tether had. Humans have to untangle these, and sometimes that untangling reveals disaster.

> There’s off-chain stuff happening.

sure, i'm asking about businesses in general and that's why i specified "properly logged"

Isn’t Mazars trumps accounting firm

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