A Trip Back to the Past

Were you one of the more than 200 million people who watched Super Bowl 57?

I was, and it did not disappoint. Between the bad referee calls, the halftime show and the commercials, it did not lack entertainment value. Sometimes these games feel like they are fixed, and I felt the Chiefs were robbed of at least one touchdown. There were a few moments where I was asking myself, "How does this happen?" and "What does this mean moving forward?" If the referee makes the wrong call, what is the potential impact when it comes to the score? 

How does this relate to the FTX scandal, and how does this impact the future?

These questions reminded me of the FTX scandal, which is reminiscent of Enron back in the early 2000s. People have claimed to have lost millions through FTX, including Kevin O' Leary, most notably known for his appearance on the popular show "Shark Tank." The result was a negative market reaction to the crypto industry.

In addition, the scandal has led to increased scrutiny in terms of regulation and the transparency of blockchain networks. When crypto was first being introduced, the uncertainty and lack of understanding of the currency led to slow acceptance of Bitcoin. As cryptocurrencies have gained popularity, custodians such as Coinbase Pro, Binance and KuCoin have made an effort to capitalize on the market. When it comes to auditing, the tracing of these transactions was difficult, due to the sheer number of transactions maintained on the Blockchain. Not to mention, in 2018, Binance lacked individual transaction IDs. 

In general, this provides a strong reminder of the importance of an audit trail to improve the stability of this market and its attractiveness to investors. FTX is a great example of what happens when there is a lack of internal controls. Unfortunately, a lack of internal controls is not a new story and is all too common.

Though it's always disappointing to hear about an alleged financial crime, to me, it is more important to learn from our mistakes and ask questions about what made the crime possible. The new CEO of FTX reported that the company’s "management could walk in and download $500 million in crypto wallets and no accounting record of that transaction would be recorded." This is baffling to me. It reminds me of my days in Accounting 101 and hearing the famous line, "Segregation of duties is the most effective way to prevent fraud."  There are a lot of questions surrounding this news, and management has its hands full.  

Managing a company can be incredibly difficult, and it takes a certain combination of drive and responsibility. During the process of managing operations, I know details can get lost, and bookkeeping isn't always the focus.  People feel that as long as they have a general sense of how the business is trending and sufficient cash is available to allow continued operations, strong accounting information and controls don’t seem to be a requirement. However, operating this way leads to a plethora of potential issues.

For example, it doesn't give your finance team the ability to ask detailed questions and understand the strengths and weaknesses of your business. It's important to understand what causes the changes year over year because the past can help inform decisions about how those changes can be handled more effectively in the future. The numbers always tell a story, and understanding the plot behind them helps with analyzing and managing operations moving forward.

When members of FTX's management saw the huge potential of the crypto market, they focused on their everyday processes of gaining more deposits to increase the amount of assets controlled to focus on profitability, much like most business owners. The absurd increases in value of Bitcoin led to the creation of numerous cryptocurrencies, which led to continued deposits, as the hype around crypto grew. 

The crypto market aside, the issues at FTX highlight the importance of having internal controls and also maintaining historical documentation. Ensuring that you maintain detailed, accurate and timely financial information is a high priority, whether you are FTX or a small business owner.

How does this relate to you?

There is a great deal of information out there when it comes to accounting, but it is often easy to get caught in the day-to-day business, let internal controls slip and not examine the records with an analytical eye. It's always great to have a second or third set of eyes on something to check our work. If you have a small accounting team, it may be a good idea to have another set of eyes. Most of the time, this leads to everyone learning something, which is its own reward. It is always a blast to use past experiences to help answer problems of today. Accounting 101 is not the most glamorous concept, but neither is being on the front page with lawyers and a subpoena, trying to answer the question – How does this happen?

About Schneider Downs Business Consulting 

Schneider Downs Business Consulting delivers sophisticated consulting services to meet the complex needs of today’s business environment. Our team features experienced professionals across a diverse array of specialties that allows us to help our clients make more informed business decisions across every facet of their operations.  

To learn more, visit our dedicated Business Consulting page.