Accounting Red Flags Are Common Among Public Crypto Companies
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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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New York Watch Auctions Record Uptick in Sales in the Face of Market Slowdown
By LAURIE KAHLE
Mon, Jun 24, 2024 4 min

Luxury watch collectors showed ongoing strong demand for Patek Philippe, growing interest in modern watches and a preference for larger case sizes and leather straps at the June watch sales in New York, according to an analysis of the major auctions.

Independent and neo-vintage categories, meanwhile, experienced declines in total sales and average prices, said the report from  EveryWatch, a global online platform for watch information. Overall, the New York auctions achieved total sales of US$52.27 million, a 9.87% increase from the previous year, on the sale of 470 lots, reflecting a 37% increase in volume. Unsold rates ticked down a few points to 5.31%, according to the platform’s analysis.

EveryWatch gathered data from official auction results for sales held in New York from June 5 to 10 at Christie’s, Phillips, and Sotheby’s. Limited to watch sales exclusively, each auction’s data was reviewed and compiled for several categories, including total lots, sales and sold rates, highest prices achieved, performance against estimates, sales trends in case materials and sizes as well as dial colors, and more. The resulting analysis provides a detailed overview of market trends and performance.

The Charles Frodsham Pocket watch sold at Phillips for $433,400.

“We still see a strong thirst for rare, interesting, and exceptional watches, modern and vintage alike, despite a little slow down in the market overall,” says Paul Altieri, founder and CEO of the California-based pre-owned online watch dealer BobsWatches.com, in an email. “The results show that there is still a lot of money floating around out there in the economy looking for quality assets.”

Patek Philippe came out on top with more than US$17.68 million on the sale of 122 lots. It also claimed the top lot: Sylvester Stallone’s Patek Philippe GrandMaster Chime 6300G-010, still in the sealed factory packaging, which sold at Sotheby’s for US$5.4 million, much to the dismay of the brand’s president, Thierry Stern . The London-based industry news website WatchPro estimates the flip made the actor as much as US$2 million in just a few years.

At Christie’s, the top lot was a Richard Mille Limited Edition RM56-02 AO Tourbillon Sapphire
Richard Mille

“As we have seen before and again in the recent Sotheby’s sale, provenance can really drive prices higher than market value with regards to the Sylvester Stallone Panerai watches and his standard Patek Philippe Nautilus 5711/1a offered,” Altieri says.

Patek Philippe claimed half of the top 10 lots, while Rolex and Richard Mille claimed two each, and Philippe Dufour claimed the No. 3 slot with a 1999 Duality, which sold at Phillips for about US$2.1 million.

“In-line with EveryWatch’s observation of the market’s strong preference for strap watches, the top lot of our auction was a Philippe Dufour Duality,” says Paul Boutros, Phillips’ deputy chairman and head of watches, Americas, in an email. “The only known example with two dials and hand sets, and presented on a leather strap, it achieved a result of over US$2 million—well above its high estimate of US$1.6 million.”

In all, four watches surpassed the US$1 million mark, down from seven in 2023. At Christie’s, the top lot was a Richard Mille Limited Edition RM56-02 AO Tourbillon Sapphire, the most expensive watch sold at Christie’s in New York. That sale also saw a Richard Mille Limited Edition RM52-01 CA-FQ Tourbillon Skull Model go for US$1.26 million to an online buyer.

Rolex expert Altieri was surprised one of the brand’s timepieces did not crack the US$1 million threshold but notes that a rare Rolex Daytona 6239 in yellow gold with a “Paul Newman John Player Special” dial came close at US$952,500 in the Phillips sale.

The Crown did rank second in terms of brand clout, achieving sales of US$8.95 million with 110 lots. However, both Patek Philippe and Rolex experienced a sales decline by 8.55% and 2.46%, respectively. The independent brand Richard Mille, with US$6.71 million in sales, marked a 912% increase from the previous year with 15 lots, up from 5 lots in 2023.

The results underscored recent reports of prices falling on the secondary market for specific coveted models from Rolex, Patek Philippe, and Audemars Piguet. The summary points out that five top models produced high sales but with a fall in average prices.

The Rolex Daytona topped the list with 42 appearances, averaging US$132,053, a 41% average price decrease. Patek Philippe’s Nautilus, with two of the top five watches, made 26 appearances with an average price of US$111,198, a 26% average price decrease. Patek Philippe’s Perpetual Calendar followed with 23 appearances and a US$231,877 average price, signifying a fall of 43%, and Audemars Piguet’s Royal Oak had 22 appearances and an average price of US$105,673, a 10% decrease. The Rolex Day Date is the only watch in the top five that tracks an increase in average price, which at US$72,459 clocked a 92% increase over last year.

In terms of categories, modern watches (2005 and newer) led the market with US$30 million in total sales from 226 lots, representing a 53.54% increase in sales and a 3.78% increase in average sales price over 2023. Vintage watches (pre-1985) logged a modest 6.22% increase in total sales and an 89.89% increase in total lots to 169.

However, the average price was down across vintage, independent, and neo-vintage (1990-2005) watches. Independent brands saw sales fall 24.10% to US$8.47 million and average prices falling 42.17%, while neo-vintage watches experienced the largest decline in sales and lots, with total sales falling 44.7% to US$8.25 million, and average sales price falling 35.73% to US$111,000.

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