Bitcoins and Beyond: Crypto-Asset Considerations For Auditors/Forensic Accountants

Research by: Daniel Dupuis, Debbie Smith, Kimberly Gleason, & Yezen Kannan

EXECUTIVE SUMMARY

Given the relative nascence of digital assets, we provide a holistic overview of the topic within the framework of accounting practices. This article first places virtual assets within the context of money taxonomy and details the microstructure of a transaction using crypto assets. We then focus on the auditor considerations associated with digital assets. We address the current accounting treatment of virtual coins and explain the challenges posed by digital assets for forensic auditors within the framework of management assertions. We identify the fraud risk factors that auditors should recognize and describe potential innovations in the digital currency markets that may introduce complexities for the accounting industry, including central-bank backed digital coins, privacy coins, initial coin offerings, crypto-secrecy jurisdictions, and dark web transactions.

Digital coins are, in general, reported as an intangible asset for non-financial industries; however, reporting guidelines are not formalized, and the rules are modified for the financial industry. Several stakeholders have called on regulatory agencies to address the matter formally and to modify the guidelines to better align the financial statements with the economic use of cryptocurrencies. Accountants should consult the FASB Meeting Handout (FASB 2022) and the most recent AICPA Practice Aid (AICPA 2022). The IASB staff recommends that cryptocurrency follow IAS 38, Intangible Assets, and for cryptocurrencies held for sale, IAS 2, Inventories.

There is a heightened risk in firms using cryptocurrency for transactions because of the limited audit trail, and the risk increases when cryptocurrency is used to pay for transactions such as compensation, acquisitions, dividends, or payment for contracts, especially when related parties are involved. Holding digital assets and using cryptocurrency for transactions creates risk and increases the possibility of litigation; unsuspecting business associates could be named in legal filings due to blockchain or crypto assets.

Furthermore, several digital currencies, such as Monero, Dash, and Zcash, were specifically created to protect the anonymity of participants in transactions. These coins actively implement an obfuscated public ledger where any trader can transact without revealing the source, amount, and destination. Shielding the participants in a transaction requires active intervention by the beneficial owner, and while few organizations presently have the required knowledge to safeguard anonymity, additional coins with enhanced privacy features will likely evolve. It remains unclear whether the auditing profession is equipped to authenticate such transactions or provide assurances that the client is conducting legitimate trades.

The risk associated with digital assets requires consideration in every phase of the audit, from client acceptance and continuance to planning and evaluating evidence. This study demonstrates that accounting for digital assets requires expertise in every management assertion related to recording and auditing the assets in the firm’s financial statements as digital assets affect many areas of the internal control framework. The broad range of examples presented in this study of firm transactions using virtual tokens provides robust support for Deloitte’s call for the FASB to reconsider the identification of digital assets as intangible because the applications represent core business transactions. The AICPA and PCAOB should consider providing audit expectations on the evidence for the valuation of thinly traded digital assets. This article identifies several specific, ongoing innovations that the auditing profession should be vigilant about going forward, such as central bank digital coins, dark web transactions, and privacy coins, that forensic accountants should continue to monitor.

To cite this article:  Dupuis, D., Smith, D., Gleason, K., & Kannan, Y. (2023). Bitcoins and Beyond: Crypto-asset considerations for auditors/forensic accountants. Journal of Forensic and Investigative Accounting, 15(3), 489-510.

To access this article: https://www.nacva.com/jfia-current#9

About the Journal

The Journal of Forensic and Investigative Accounting (JFIA) is an open access journal that publishes creative and innovative studies employing research methodologies that logically and clearly identify, describe, and illuminate important academic forensic accounting, fraud, and litigation services issues; tests and improves forensic accounting research skills, tools, and techniques; stimulates discussion and experimentation in instructional means, methods, and materials in the field of forensic accounting and research in general; exchanges of ideas and findings about developments related to instruction, learning, and curricular issues in forensic accounting and fraud education.

The Journal of Forensic and Investigative Accounting solicits unpublished manuscripts not currently under consideration by another journal or publisher. Each article will be published electronically as soon as the editor, based upon advice from referees, determines that the manuscript meets the objectives and standards set forth by the editor and the journal’s editorial board and the publisher places the article online.

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