Cryptocurrency versus the auditor

Some don’t consider cryptocurrencies as an investment. Some are dead against SMSF trustees investing retirement funds into this asset class – but with all the hype, whether it is right or wrong, where does this leave the auditor when a fund has in fact, already, invested?

Let’s look at the considerations for the auditor.

Financial statement audit considerations

First off, the auditor needs to consider editing their audit plan and audit strategy to ensure the risks associated with this specific asset class are documented and considered.

The primary concern of the auditor from a financial statement perspective is that the auditor must establish if the asset exists, and then if it does, what it is worth at year end.

To this end, the SMSF trustee must have considered how the cryptocurrency will be held by the fund trustee. A wallet simply in the name of the member is not sufficient audit evidence that the asset is held by the fund. The intent of the trustee to hold the asset for the fund is not sufficient, and where there is insufficient information to evidence asset ownership, the auditor may have to conclude that the fund has not invested in cryptocurrency, but in a loan to the member instead.

There are cryptocurrency account providers that now allow an SMSF to set up a wallet to facilitate the fund investment in cryptocurrencies, which document that the asset is in fact held in trust for the fund.

If the auditor has sufficient information to evidence fund ownership of the asset, the next audit issue is that of valuation, and this is a significant one given the level of volatility in cryptocurrency values.

The auditor should consider taking an average value per coin as at 30 June, 2018. We are then planning to request our clients insert a note in the financial statements detailing the volatility of the asset class in terms of value, and depending on materiality, consideration will be given to including an emphasis of matter in the audit report drawing attention to the values reported, and the volatility of the asset class.

Of course, on the point of materiality, all audit testing at a financial statement level is driven by materiality, so if the investment is immaterial, the auditor doesn’t need to spend inordinate amounts of time reviewing the asset for existence and value.

As to concerns regarding the controls surrounding the use of the wallet, and the accessibility of the wallet – these are no different to concerns regarding other asset classes, and the trustee should take care to ensure the wallet passwords and log in information remain confidential. At no time should the auditor request the wallet log in details to verify the asset held by the fund. The client would need to arrange to visit the office of the auditor, or if possible, screen share between the auditor and the client systems to allow the auditor to view the wallet information for the purpose of gathering evidence for the audit.

SIS compliance audit considerations

The Superannuation Industry (Supervision) Act (SIS) does not prohibit investment in cryptocurrencies. There is no issue at a compliance level with a fund trustee deciding to invest in this asset class – provided of course all the other investment prohibitions are complied with.

That is, cryptocurrency does not satisfy the definition of money, and as such, it cannot be contributed to the fund by a related party, nor can it be acquired from a related party.

Where a fund has received their cryptocurrency via a contribution or from a transfer from a related party, the auditor would need to review the materiality of the transaction to determine if the compliance audit opinion needs to be qualified, and if ATO reporting in an auditor contravention report is mandatory. Either way, the auditor would need to instruct the trustee to divest of the cryptocurrency to correct the contravention of the acquisition of asset rules of SIS.

Where the fund invests directly but the auditor identifies the wallet is in the name of the member only, like any other asset, this gives rise to compliance issues, such as determining whether the fund has lent the member the funds for them to invest in the cryptocurrency or not. This of course would give rise to member loans, consideration on whether the trustee has kept fund assets separate and in-house asset considerations.

The fund deed also should also be reviewed to ensure it permits these types of investments. The fund investment strategy should be updated by the fund trustee prior to investing to document the risks associated with the investment, and to permit the fund to have this class of assets.

Notwithstanding there are many that consider investing in cryptocurrency highly speculative and risky, there are no SIS restrictions on this, except with regard to the trustee acting prudently, and the trustee ensuring the sole purpose test has been satisfied. Even where the fund loses money on investments, the trustee may still satisfy the sole purpose test, and may still be acting prudently. As a result, any concerns by auditors regarding the logic of such an investment are irrelevant. Auditors cannot dictate which investment classes a fund can or cannot invest in - whether they are licensed to give advice or not. If a fund trustee decides to invest, then that is their right and choice to do so. The auditor cannot request a fund divest of their cryptocurrency investments on a presumption that the fund will fail the sole purpose test because the investment might be a poor one.

Auditors feeling exposed to the volatility of the asset class can address this in an emphasis of matter in their audit report, or if extreme, perhaps consideration would need to be given to resigning from the audit engagement.

Auditors should be reminded that we audit what we are given. We cannot pass judgement on the sanity of investment choices by trustees. We can only focus on the financial statement and compliance audit issues to ensure the audit opinions issued are fairly stated.

Rightly or wrongly, cryptocurrency will feature in many 2018 financial statements for our SMSF clients, and auditors should consider now what steps should be taken in the lead-up to 30 June, to ensure they have adequate audit evidence of existence, value and SIS compliance to make auditing these asset classes as painless as possible.

Belinda Aisbett, director, Super Sphere