The challenge of auditing digital assets

Published on January 05, 2023

In a guest post Nicholas Newman, Head of Digital Assets at Harris & Trotter LLP, writes for The Audit Directory about the problems associated with auditing digital assets. 

Whilst the first block of the blockchain was mined on 3rd January 2009, over 14 years ago, accountancy firms have been slow in the development of their service offering to Crypto native firms.

The prices of digital assets, notably Bitcoin, have been extremely volatile since exception creating many boom and bust moments.  This volatility, along with its ‘bad press’ has certainly not assisted in persuading traditional accountancy practices to move into the space. Whilst approximately 1 in 5 adults in the UK have held a digital asset during their lifetime, for the majority of accounting firms, their crypto offering does not extend past personal tax.

Very few firms, worldwide, have the capability of providing assurance services to crypto native firms and most notably of those that have, some of the largest have recently announced that they are exiting the space. 

Harris & Trotter LLP has invested in, developed and built its crypto knowledge since 2017 and does provide services to some of the largest crypto native entities in the world including to, 1inch, Wintermute and The Sandbox.

The three key issues that audit firms need to overcome so as to provide assurance services in the digital asset space are as follows:

  1. Be able to read the blockchain. The primary transactions of crypto native entities occur on chain, not within a bank account. The blockchain is a bunch of transaction hashes, letters and numbers, being able to competently read and interpret this data is key.
  2. Proving ownership of digital assets. Digital assets are primarily held within wallets where no 3rd party confirmation can be obtained over their ownership (like a bank letter). Whilst knowing what assets are contained within a wallet is relatively straight forwards, proving ownership of the wallet creates a significant risk issue. Amongst other methods, Harris & Trotter LLP has created its own signature matching tool so as to prove ownership.
  3. Technology. There are no SaaS products which are readily available that can be utilised by assurance firms, thus assurance firms must be able to create their own inherent technology so as to perform audit testing in the space. Products created by Harris & Trotter LLP include the following:
    1. A proof of reserves merkle tree
    2. A wallet signature matching tool
    3. A crypto valuation script
    4. A royalty audit script
    5. Accrued defi position scripts

The digital asset space is evolving at rates faster than accounting firms can keep up with, successful firms who cater to this space will be more akin to technology firms in the future.

Nicholas Newman
Partner Harris & Trotter LLP