By Ben Sherry, Inc. (TNS)
If you don’t think keeping your financial records and transactions is an essential part of your life as an entrepreneur, just look at FTX. In a recently released report by Debtors of the once lauded cryptocurrency exchange, newly installed FTX CEO John J. Ray III explained how a lack of financial and accounting controls helped doom the company.
Here are some lessons learned from the report on what NOT to do when accounting.
1. Don’t hire a general accountant for a specialized company.
According to Ray, FTX, which controlled tens of billions of dollars in assets across its various companies, had no dedicated financial risk, audit, or treasury departments, writing that “policies and procedures relating to accounting, financial reporting, cash management, and risk management did not exist, was incomplete, or was very generic and unsuitable for a business managing significant financial assets.
When FTX learned in 2020 that to be listed on NASDAQ the company would need to have its policies and procedures audited, senior management reportedly scrambled to fraudulently craft policies that could be presented to auditors in just 24 hours. The majority of FTX’s bookkeeping was done by a small outside firm, which Ray said had no specialist knowledge of cryptocurrencies or international financial markets.
It goes without saying, but it’s important to hire accountants, auditors, and financial risk professionals who can create policies to protect your organization from internal and external fraud, and ensure that you at least know where your assets.
2. Don’t use just any accounting system.
FTX has also faltered in its near total lack of accounting systems. In the report, Ray writes that 56 entities within FTX produced no financial statements, while 35 entities used QuickBooks.
For this reason, FTX even struggled to understand its own positions. A June 2022 “portfolio summary” purporting to model cryptocurrency positions held by Sam Bankman-Fried’s Alameda hedge fund said, with respect to valuation data for certain tokens, that staff should “propose numbers? I don’t know.”
Bankman-Fried himself acknowledged the situation at FTX, writing in an internal communication that Alameda was “hilarious beyond any threshold allowing any listener to even partially pass an audit,” adding that “sometimes we find 50 million dollars worth of assets lying around that we’ve lost track of; c’est la vie.”
To be clear, such is NOT life. Companies with operations as large as FTX normally use either advanced off-the-shelf enterprise resource planning systems or their own proprietary systems tailored to their own specific needs, such as, for example, a cryptocurrency exchange. cash.
3. Don’t approve expenses with emojis.
Ray writes in the report that key documents, including cash flow, equity statements, and data on intercompany and related party transactions, either did not exist or were not prepared regularly. Regarding transaction records were found somewhere they should never be: Slack.
Yes, expenses and invoices for FTX were submitted on Slack and approved via emoji, leaving debtors in the dark about why transfers were made and where they were transferred to. The report claims that messages sent on Slack and secure messaging apps like Signal and Telegram were used to approve the transfer of tens of millions of dollars.
This complete lack of reporting and documentation has made it extremely difficult for FTX debtors to even have an idea of how much they have lost in assets. Debtors had to rebuild the company’s historical data from scratch and are now simply trying to “make sense of the many resulting discrepancies, anomalies and undocumented positions”.
(c) 2023 Mansueto Ventures LLC; Distributed by Tribune Content Agency LLC.