Former accounting team of FTX US Auditor Armanino sets up shop as the network firm

Members of accounting firm Armanino’s digital asset practice have left and formed a new startup – The Network Firm – to run the business of providing audits, attestations and related work for crypto clients.

The move, confirmed to CoinDesk this week by people familiar with the matter, came after Armanino decided late last year to stop performing crypto audits amid increased scrutiny of past work for a US branch of Sam Bankman-Fried’s FTX exchange. Armanino has said it stands by its 2020 and 2021 revisions to FTX US.

The official separation of the digital assets team, led by Noah Buxton, took effect Wednesday, the people said. According to the company’s LinkedIn page, The Network Firm was founded this year and is based in Miami.

Armanino’s previous crypto clients included stablecoin TrueUSD (TUSD), crypto exchange Kraken, digital asset lender Nexo and investment firm CoinShares, and several of the accounts are expected to follow the team to the new firm, the people said.

Buxton declined to comment at this time.

The crypto industry was hit hard by FTX’s collapse, with falling prices of bitcoin (BTC), solana (SOL) and other tokens, a series of industry bankruptcies, the filing of class-action lawsuits, a regulatory breach and extra attention from lawmakers.

The Armanino episode highlights another chokepoint: Crypto firms are finding it increasingly difficult to get large, established accounting firms to provide audits and back-up certificates, even as the digital-asset industry pushes desperately to shore up trust and a reputation battered by developments in 2022.

San Ramon, Calif.-based Armanino is a top-25 company with more than 2,500 employees and 22 offices across the United States.

A banner on the company’s website says its founders “have been pioneering the development of crypto-native accounting and attestation services as well as traditional tax and audit capabilities since 2016.”

“The networking firm is 100% focused on the professional service needs of the crypto and digital asset industry,” its website states. “We know that digital assets will transform all sectors of our economy driven by the potential of blockchain. As this shift accelerates, The Network Firm will play an important role in providing the trust and transparency that champion this new industry.”

The pitch may be less impressive to large investors and companies from traditional finance, as they are likely to be more focused on the reputational risk of relying on the audit work of a newly established firm with more limited resources.

Crypto companies, many of them still in business themselves, would probably not be as bothered or put off by the idea of ​​working for a small firm with a short track record – especially since the former Armanino accountants can rightfully boast of their knowledge and experience in the emerging and fast-moving industry.

In January, U.S. Senators Elizabeth Warren of Massachusetts and Ron Wyden of Oregon wrote a letter to the Public Company Accounting Oversight Board (PCAOB) asking whether the activities of Armanino and Prager Metis, another accounting firm that did business with FTX, complied with ” standards of professional practice” or if there were any warnings about “a lack of professional skepticism.” (PCAOB Chairwoman Erica Williams has said the agency could not inspect FTX’s audits because it is not a public company.)

Francine McKenna, a full-time lecturer at the University of Pennsylvania’s Wharton Business School who has written extensively on crypto-auditing practices, says that even firms the size of Armaninos are seen in the accounting industry as a significant step down from the “Big Four” of Deloitte, PwC, Ernst & Young and KPMG.

Few of these larger firms would agree to audit work for crypto companies, she said, although Deloitte is working with Coinbase, the publicly traded U.S. crypto exchange.

“It’s incredibly risky even for a Big Four firm that has hundreds of thousands of people available to them globally, and people who have experience from all industries, especially the financial industry,” she said.

For now, most blockchain firms may have to rely on these smaller outfits.

“They’ve gone from the bush leagues down to peewee,” she said.

A key innovation from Armanino’s digital asset team, the TrustExplorer tool designed to provide real-time data on project reserves to blockchain users, has been transferred to The Network Firm, people with knowledge of the matter said.

The new site describes a real-time backup product, LedgerLens, designed to “close the visibility gap between on-chain liabilities and off-chain assets, all with industry-standard attestation reporting, and with unmatched frequency.”

Executives at Archblock, which backs the TrueUSD stablecoin, a customer of the former Armanino real-time reserves reporting service, were “very surprised” to learn that the major accounting firm was dropping crypto clients, according to COO and CFO Alex de Lorraine.

Archblock plans to continue using the product under The Network Firm, he said.

“The company may be new, but the partners have been working in the industry for a long time, and many of the team members were part of the first attestation engine,” de Lorraine told CoinDesk in an email.

Kraken, another client, was “understandably disappointed by Armanino’s decision to end their crypto practice,” but remains “firmly committed to undergoing proof-of-reserves audits,” according to a press representative.

“Kraken is currently exploring a number of options to continue to provide customers with full transparency and a means to cryptographically verify that funds held in backed assets are held in their entirety on the exchange,” the representative told CoinDesk in an email. “We look forward to sharing more details about our plans in the near future.”

Press officials for CoinShares and Armanino declined to comment, and a request for comment from Nexo went unanswered.