Accounting Red Flags Are Common Among Public Crypto Companies | Kanebridge News
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Accounting Red Flags Are Common Among Public Crypto Companies

Weak controls and related-party transactions appear in disclosures across industry

By BEN FOLDY
Thu, Dec 8, 2022 9:13amGrey Clock 4 min

Investors bemoan the lack of disclosure in the crypto industry. But many crypto companies disclose a lot of information, and some of it is worrisome, a review of financial statements shows.

The blowups of FTX and Celsius Network LLC exposed hidden risks that might have raised red flags for investors, including related-party transactions, commingled customer funds, sketchy record-keeping and questionable accounting. Some of these problems often appear in disclosures by public crypto companies, including weak systems used to keep numbers accurate.

A look at 19 of the publicly traded crypto miners showed that 16 disclosed significant internal-control weaknesses in the past four years, some of which were “alarming,” according to Bedrock AI, which makes software that analyses financial filings. Crypto miners build powerful networks of computers that process transactions and are rewarded in newly generated currency.

The bitcoin miner Riot Blockchain Inc. filed an annual report in March that identified four material weaknesses in internal controls. One of those weaknesses raised questions about how the company determines its revenue, one of the simplest and most important numbers in accounting.

On the day before Thanksgiving, the company filed its second amended version of the March report to say that auditors didn’t assess internal controls on a third of the company’s revenue and assets. They hadn’t analysed two of Riot’s significant acquisitions from 2021, the company said.

A spokeswoman for Riot said the filing was amended because the notice that the subsidiaries had been excluded from the assessment was inadvertently left out of the company’s disclosures.

“Crypto auditing and accounting is very much still a work in progress,” saidSean Stein Smith, an accounting professor at Lehman College, City University of New York.

Checks on internal controls are important parts of an audit because they give accountants confidence that the numbers they are looking at are valid. Weak internal controls can lead to restatements of financial reports.

Another large bitcoin miner, Marathon Digital Holdings Inc., disclosed problems with internal controls tied to revenue and its assets. It added that it hadn’t effectively designed a control to detect significant misstatements in revenue.

The company said it would work to remedy the problem by adding staff in financial and information-technology roles. The company, with a stock-market value of about $700 million, has in the past two years grown to 26 full-time employees from three, Marathon said.

Marathon has also made investments in related parties. In September, the company invested $30 million in a private company called Auradine Inc., whose business isn’t described in Marathon’s filings. Marathon’s chief executive officer, Fred Thiel, serves on Auradine’s board, and another Marathon board member is a 10% shareholder of Auradine, according to Marathon’s disclosures.

A Marathon spokesman said Auradine is an early-stage company that is a strategic investment for Marathon.

Basic accounting and operational controls can take a back seat to growth at crypto companies, as the Celsius implosion indicated. The bankrupt lender failed to ensure that customer funds in certain deposit accounts were set aside from the rest of its crypto holdings, an independent examiner appointed in the company’s chapter 11 case found.

“Due to time pressure and lack of engineering resources, Celsius chose [instead of controls] to rely on manual reconciliations and transfers of crypto assets…for the custody program,” the examiner wrote in November.

Celsius didn’t respond to a request for comment.

The lack of standardised accounting rules for cryptocurrencies can mean that even audited financial statements might fail to convey the true state of a company’s finances. Crypto doesn’t fit neatly into the definitions used to categorise assets. It lacks the government or commodity backing needed to be treated as cash, it is too volatile to be a cash equivalent, and it isn’t necessarily a financial instrument or security either, said Vivian Fang, an accounting professor at the University of Minnesota.

Regulators and accounting rule makers are working to fill the void in crypto accounting standards. The Financial Accounting Standards Board, the U.S. standards setter, aims to issue proposed rules next year.

Most companies holding cryptocurrencies have been treating them as indefinite-lived intangible assets, similar to intellectual property such as trademarks. But accounting rules allow such assets to be valued upward only when they are sold, meaning a company’s reported balance sheet might not reflect the current value of its holdings. FASB has signalled that companies should hold bitcoin and many other crypto assets at fair value.

There are also questions over whether exchanges should have to include customer deposits as assets and corresponding liabilities. The Securities and Exchange Commission in March issued accounting guidance saying they should do so.

The wild price moves of bitcoin can create odd results for miners that hold big slugs of the cryptocurrency.

Riot Blockchain said in disclosures that it has booked $126 million in revenue from bitcoin mining through September. That was more than offset by $132 million in impairment charges related to bitcoin’s declining price.

The full impact of these big price moves can sometimes only be seen in the footnotes to financial statements. In early November, Marathon said, it held approximately 11,440 bitcoin. Mr. Thiel, the CEO, citing third-party data, has described the holding as the second-largest among publicly traded companies.

In the footnotes, Marathon also said that roughly 83% of that bitcoin amount was pledged as collateral on around $100 million in loans.

On the company’s earnings call Nov. 8, Marathon’s chief financial officer said the company didn’t expect significant additional collateral requirements for the borrowing. The next day, cryptocurrencies’ volatility struck again. FTX’s collapse drove down bitcoin’s price, and Marathon was called on to post more bitcoin holdings as additional collateral, the company disclosed.

Marathon said Tuesday that it has since paid down its loan balance to around $80 million, reducing currently pledged bitcoin to roughly 65% of Marathon’s holdings.

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High-Earning Men Are Cutting Back on Their Working Hours

While most U.S. workers are putting in fewer hours, men in the top 10% of earners cut back their time on the job the most, according to a new study

By Courtney Vinopal
Fri, Jan 27, 2023 4 min

American workers have cut the number of hours they spend in their jobs since 2019, but no group has dialled back its time on the clock more than young, high-earning men whose jobs typically demand long hours.

The top-earning 10% of men in the U.S. labor market logged 77 fewer work hours in 2022, on average, than those in the same earnings group in 2019, according to a new study of federal data by the economics department at Washington University in St. Louis. That translates to 1.5 hours less time on the job each workweek, or a 3% reduction in hours. Over the same three-year period, the top-earning 10% of women cut back time at work by 29 hours, which translates to about half an hour less work each week, or a 1% reduction.

High-earning men in the 25-to-39 age range who could be described as “workaholics” were pulling back, often by choice, says Yongseok Shin, a professor of economics, who co-wrote the paper. Since this group already put in longer hours than the typical U.S. worker—and women at the highest income levels—these high earners had longer work days to trim, Dr. Shin says, and still worked more hours than the average.

The drop in working hours among high-earning men and women helps explain why the U.S. job market is even tighter than what would be expected given the current levels of unemployment and labour force participation, Dr. Shin says.

“These are the people who have that bargaining power,” Dr. Shin says of the leverage many workers have had over their employers in a tight job market. “They have the privilege to decide how many hours they want to work without worrying too much about their economic livelihood.”

The paper published by the National Bureau of Economic Research, which isn’t yet peer reviewed, suggests high earners were more likely to benefit from flexible working arrangements, which could be a factor in reduced work hours.

Before the pandemic, Eli Albrecht, a lawyer in the Washington, D.C., area, says he worked between 80 to 90 hours a week. Now, he says he puts in 60 to 70 hours each week. That’s still more than most men in America, who averaged 40.5 hours a week in 2021, according to federal data.

Mr. Albrecht’s schedule changed when he shared Zoom school duties for two of his young children with his wife. He’s maintained the reduced hours because it’s making his relationship more equitable, he says, and gives him family time.

“I used to feel—and a lot of dads used to feel—that just by providing for the family financially, that was sufficient. And it’s just not,” Mr. Albrecht says.

The downshift documented by Dr. Shin and his colleagues occurred as many professionals have been reassessing their ambitions and the value of working long hours. Emboldened by a strong job market, millions of Americans quit their jobs in search of better hours and more flexibility.

Overall, U.S. employees worked 18 fewer hours a year, on average, in 2022 compared with 2019, with employed men putting in 28 fewer hours last year and employed women cutting their time by nine hours, data from the U.S. Census Bureau’s Current Population Survey show. The average male worker put in 2,006 hours last year, while the average female worker logged 1,758 hours.

Separate data from the Census Bureau suggests that men with families, in particular, are working less. Between 2019 and 2021, married men devoted roughly 13 fewer minutes, on average, to work each day, according to the American Time Use Survey, which hasn’t yet published 2022 figures. They spent more time on socialising and relaxing, as well as household activities, according to men surveyed by the Census Bureau. The amount of time unmarried men spent on work changed little during that same period.

As high-earning workers in the U.S. cut back, low-wage workers increased their hours, according to Dr. Shin’s research. The bottom-earning 10% of working men logged 41 hours more in 2022, on average, than in 2019. Women in the lowest earning group boosted their hours worked by 52 last year compared with 2019.

While women work fewer hours than men, the unpaid labor they perform outside of their jobs has been well documented. Many working mothers take what’s termed a “second shift,” devoting more time outside work hours to child care and housework.

Maryann B. Zaki, a mother of three who has worked at several firms, including in big law, recently launched her own practice in Houston, giving her more control over her hours. She says she’s noticed more men in her field opting for reduced schedules, sometimes working 80% of the hours normally expected—which can range from 40 to more than 80 a week—in exchange for a 20% pay cut. For the average lawyer, that would amount to a salary reduction of tens of thousands of dollars each year; such arrangements were initially offered to aid working mothers.

Responding to new expectations of work-life balance may be particularly vexing for industries already facing staffing shortages, such as those in medicine. Dr. Lotte Dyrbye, the chief well-being officer for the University of Colorado School of Medicine, said she often hears from early-career physicians and other medical professionals who want to work fewer hours to avoid burnout.

These medical workers are deciding that to be in it for the long haul requires a day every week or two to decompress, Dr. Dyrbye says. But as staff cut back their hours, it costs medical organisations money and may compromise access to care.

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