The SEC’s Office of Investor Education & Advocacy, along with the Office of the Chief Accountant, is issuing this Investor Bulletin to alert investors in the crypto asset markets of the risk of relying on audits not conducted following SEC rules & Public Company Accounting Oversight Board (“PCAOB”) standards.

Amid recent turmoil in the crypto asset markets, some crypto asset trading platforms & issuers of so-called “stablecoin” crypto assets have issued “proof of reserves” reports in an effort to reassure investors & customers about the safety of their crypto assets.  In some cases, these reports have been portrayed as either equivalent to, or even as more “precise” than, audited financial statements.

In reality, these reports & the reviews that underlie them are not equivalent to financial statement audits & lack important investor protections provided by financial statement audits. The same is true of “valuation” or “calculation” reports that may be used in other industries. For these reasons, investors should carefully consider these limitations & not place the same degree of reliance on these types of reports as they would on financial statements that have been audited by an independent auditor in accordance with SEC rules & PCAOB independence & auditing standards.

What is the role of financial statement audits?

Public companies & SEC-registered broker-dealers are required to file annual reports, which include audited financial statements, with the SEC. These financial statements are designed to provide investors with a complete & accurate picture of a company’s financial health & risks. To promote the accuracy & reliability of these statements, they are required to be audited by an auditor that is independent of the audit client, conducts the audit in accordance with the rules & standards of the SEC & the PCAOB, & is subject to regulatory oversight by the SEC & PCAOB.

Contrary to how they have sometimes been portrayed, proof of reserves, valuation, & calculation reports are not audit reports as defined by the PCAOB & the SEC. Among other important differences:

  • These services may have no specific requirements for the engagement or the information reported, allowing an entity full discretion to manage the terms of the engagement. For example, a proof of reserves report does not include a complete set of financial statements & does not tell investors the whole story about the entity’s liabilities.
  • Unlike financial statement audits, which can only be performed by registered accounting firms, proof of reserves, valuation, & calculation reports may be provided by either registered or unregistered accounting firms, or by another third party, & often provide no assurance as to the reliability of the information provided.
  • Even when provided by a registered accounting firm, investors should be aware that these services may fall outside of PCAOB regulatory oversight, & may not be subject to, for example, PCAOB standards or inspections, or PCAOB enforcement proceedings. Investors should be aware that registered accounting firms may provide services that are not subject to PCAOB standards.
  • Firms providing these services may not be subject to the same independence requirements as firms providing audits that are subject to SEC rules, which are designed to ensure that an auditor will exercise objective & impartial judgment with respect to the audit. Additionally, the service typically is not designed to provide any level of assurance on the related information.  

How do the PCAOB & SEC help protect investors?

Congress established the PCAOB to oversee the audits of public companies & SEC-registered broker-dealers. The mission of the PCAOB is to protect investors & further the public interest in the preparation of informative, accurate, & independent audit reports. It does so through four main activities:

  • registration of public accounting firms;
  • adoption of auditing & related attestation, quality control, ethics, & independence standards with which registered firms must comply in performing audits;
  • regular inspection of registered public accounting firms’ audits & quality control systems; &
  • investigation & discipline of registered public accounting firms & their associated persons for violations of legal rules or standards. 

The SEC has oversight authority over the PCAOB, which includes approval of PCAOB’s rules & standards. In addition, the SEC’s auditor independence rule governing audits helps to ensure that auditors are qualified & independent of their audit clients in both fact & appearance. The SEC can bring enforcement actions related to these audits.  

How can I tell if a registered public accounting firm has conducted an audit under PCAOB standards?

An audit report on the financial statements of a public company or registered broker-dealer includes the registered public accounting firm’s opinion on whether the company’s financial statements fairly present its financial position, results of operations & cash flows (often referred to as a “pass/fail opinion”).

The report must be titled “Report of Independent Registered Public Accounting Firm.” Among other things, the report will clearly state whether the audit was conducted in accordance with PCAOB standards. 

The audit report will also state whether the auditor is providing an unqualified opinion or a qualified opinion, in which the auditor expresses disagreement with some of the information in the financial statements.

Even if they are labeled as an “audit report” or “attestation report,” reports that do not clearly state that the audit was conducted in accordance with the standards of the PCAOB are not audit reports under PCAOB standards.

Such non-audit reports —even if performed by a PCAOB-registered accounting firm—lack important investor protections offered by PCAOB & SEC oversight, as discussed above. Investors should carefully consider these limitations before placing reliance on such non-audit reports when making a decision to invest in, or use the services of, an entity.
It is a red flag if an entity portrays non-audit services, such as proof of reserves reports, as equivalent, or superior, to audits meeting PCAOB standards. Examples include using terms such as a “GAAP audit” or a “Valuation Audit” to describe the services. Additionally, entities & associated individuals may exacerbate confusion by touting “successful” audits. We strongly caution investors that such reports are different from, & should not be taken as a substitute for, audits conducted by registered public accounting firms under PCAOB standards. 

Only audits performed by registered public accounting firms & conducted in accordance with PCAOB standards have all of the investor protections mandated by the PCAOB & SEC.

Additional Resources

Investor Alert: “Exercise Caution with Crypto Asset Securities”

PCAOB Investor Advisory: “Exercise Caution with Third-Party Verification/Proof of Reserve Reports”

Call OIEA at 1-800-732-0330, ask a question using this online form, or email us at [email protected]

Visit, the SEC’s website for individual investors

The SEC encourages the public to submit any tips, complaints, & referrals with respect to fraud on investors, including auditor & accountant misconduct & potential misleading misrepresentations.

This Investor Alert represents the views of the staff of the Office of Investor Education & Advocacy.  It is not a rule, regulation, or statement of the Securities & Exchange Commission (“Commission”).  The Commission has neither approved nor disapproved its content.  This Alert, like all staff statements, has no legal force or effect: it does not alter or amend applicable law, & it creates no new or additional obligations for any person.