Recently, in a wide-ranging speech, the SEC’s Chief Accountant, Wes Bricker, provided his thoughts on how the SEC accounting staff analyzes accounting issues surrounding digital assets and distributed ledger technology. Bricker emphasized that companies must continue to maintain appropriate books and records, irrespective of whether distributed ledger technology, smart contracts or other technology-driven applications are (or are not) used. Likewise, when accounting for digital assets, companies should act appropriately within the parameters of the existing requirements of the federal securities laws. Accordingly, they should consider traditional regulations and accounting standards such as those relating to books and records, internal accounting controls, internal control over financial reporting, and custody. Bricker emphasized that “[d]istributed ledger technology and digital assets, despite their exciting possibilities, do not alter this fundamental responsibility.”
As an example, Bricker posed a simple, hypothetical fact pattern. If a balance sheet shows digital assets with an amount of $5 million, it is Bricker’s view that management is therefore asserting that:
- the digital assets recognized exist at the period end;
- the reporting entity owns or controls those digital assets;
- the digital assets are reported accurately according to an appropriate measurement basis; and
- all such digital assets owned and controlled are included within the amount of $5 million.
Bricker provided several other illustrative fact patterns as well, including with respect to fair value measurement, related party disclosures and loss contingencies. He concluded his portion of the speech on blockchain by discussing the role of the auditor and the importance of the audit committee as gatekeeper.
Although Bricker’s remarks were directed primarily at publicly traded companies, we believe they provide sensible guidance for all companies whose businesses involve digital assets. They also demonstrate the expanding nature of the SEC’s attention to these issues. The recent wave of SEC enforcement against ICO issuers and other blockchain companies was preceded by a series of speeches and other public statements intended to put the public on notice that future enforcement action was imminent. Bricker’s speech could foreshadow that the SEC is opening another front in its ongoing digital assets initiative.