Why CPAs must understand how to account for and audit digital assets

As digital assets continue to gain prevalence, it is increasingly vital that Certified Public Accountants (CPAs) understand how to account for and audit these new types of assets. According to the IRS, “digital assets are broadly defined as any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology…Digital assets include (but are not limited to) convertible virtual currency and cryptocurrency, stablecoins, and non-fungible tokens (NFTs).”

Here are a few reasons it’s essential for CPAs to know how to properly account for and audit digital assets:

Financial Reporting

Since digital assets are typically considered intangible assets, CPAs must follow the appropriate accounting procedures to accurately report the value of these assets on financial statements. This requires a firm grasp of the unique accounting principles, valuation processes, and disclosure requirements of digital assets to ensure that the financial statements are compliant with Generally Accepted Accounting Principles (GAAP) and/or International Financial Reporting Standards (IFRS).

Regulatory Compliance

With digital assets becoming more common, regulatory agencies continue to introduce new regulations that are evolving rapidly. Within this dynamic regulatory environment, it’s essential for CPAs to be up-to-date on new tax regulations, anti-money laundering laws, and other relevant guidelines to avoid penalties, fines, and other disciplinary action.

Risk Management

Digital assets have some inherent risks such as cyber security, fraud, and operational risks. Through effective auditing procedures, CPAs can identify, assess, and mitigate these risks factors to their clients.

Valuation and Impairment

As digital assets are subject to frequent valuation fluctuations, CPAs need to understand the valuation techniques to accurately estimate their market value for financial reporting purposes. Additionally, CPAs should be able to conduct an impairment analysis to anticipate and account for conditions such as market changes, technological obsolescence, or other factors that can impact value.

Audit Evidence and Procedures

Specialized knowledge is required by CPAs to audit digital assets, such as a comprehension of cryptographic concepts, transaction processes, and audit trails. Additionally, audit procedures should be created to accommodate the unique needs of digital assets. These may include processes to verify digital signatures, data analytic reviews, backup and recovery procedures, security assessments, and beyond.

In summary, CPAs must understand how to account for and audit digital assets to ensure accurate financial reporting, regulatory compliance, risk management, and to adapt to the rapidly changing business environment. Additionally, it’s essential for CPAs to stay current on accounting and auditing requirements of digital assets, and to continuously enhance their knowledge to effectively serve their clients.