IIA calls on Congress for better governance of crypto amid FTX debacle

The Institute of Internal Auditors sent a letter to lawmakers urging them to set new requirements to bolster corporate governance at cryptocurrency exchanges operating in the U.S. 

In a letter Monday to the chairs and ranking members of the Senate Committee on Banking, Housing and Urban Affairs; the Senate Committee on Agriculture, Nutrition and Forestry; the House Financial Services Committee; and the House Agriculture Committee, the IIA pointed to the recent bankruptcy of crypto exchange FTX as showing the devastating impact when companies lack adequate internal controls and fail to provide objective assurance over those controls. As a privately held company, FTX wasn't required to comply with the internal control provisions of the Sarbanes-Oxley Act.

"Unfortunately, since most cryptocurrency exchanges are not subject to SOX compliance, consumers were denied basic organizational transparency and did not possess relevant information to assess investment risk," wrote IIA president and CEO Anthony Pugliese in the letter. 

He pointed out that the absence of a robust internal audit function at FTX prevented identification and mitigation of multiple risks and highlighted the role of internal auditors in providing a board of directors with objective assurance, insight and advice independent from management. 

"The FTX collapse is the latest reminder that organizations without a robust internal audit function are, at best, playing with fire and, at worst, setting themselves and their stakeholders up for a disastrous — and entirely preventable — fall," Pugliese wrote. "Countless investors are now paying the price for FTX's failures. It's clear that we cannot rely on unregulated crypto exchanges to do the right thing on their own — we need to mandate stronger corporate governance standards and ensure accountability when these exchanges aren't protecting their customers. When bad corporate actors fail, it shouldn't be investors who are left holding the bag. A robust internal audit function protects investors and the business itself, ensuring transparency and accountability." 

Given the lessons from the FTX bankruptcy, the IIA is calling on Congress to enact two new mandates designed to promote transparency and prevent future cryptocurrency internal control failures:

• Require all cryptocurrency exchanges operating in the U.S., as well as affiliated partners, to possess a sufficiently resourced and highly qualified internal audit function; and      
• Require the senior management of cryptocurrency exchanges operating in the U.S. to certify, annually, that their exchanges' internal controls are adequate and appropriate based upon an independent internal audit assessment. 

The IIA believes its recommendations would help instill greater confidence in the cryptocurrency market.