Here is a personal experience I had once with audits and reports.  Read if you have nothing better to do, or if you suffer from insomnia and ran out of sleeping pills.

Public universities in Brazil, like all government institutions, have lots of red tape and restrictions on things like hiring temporary workers, buying equipment, charging for consultancies, etc..  In order to dodge thos restrictions, every university created at least one "supporting" Foundation, that is not formally part of the university, whose stated mission is to "do things that that the University wants to do but the law forbids it from doing." (Yes, it is as fishy as it sounds.)

Being private or semi-private, a Foundation in Brazil has fewer restrictions than a government institution; but it still must keep good accounting, prepare yearly financial report, have the report formally approved by its Board of Trustees, and submit it to a specific branch of the Judiciary.  The latter is  supposed to check, through the financial report, that the Foundation's money is not being pocketed by the trustees or staff, and is being used to foster the Foundation's mission as stated in its "constitution". 

A few years ago, when I became department chairman, I became automatically a member of the Board of Trustees of UNICAMP's support Foundation.  (On my first meeting I learned that the Foundation was actually insolvent, since it had about 2 million USD in the bank, turned about 2 million USD per year, and owed 6 million USD to the government in labor taxes.  It had not been shut down yet only because it kept telling the law and tax officers that closing it would force the university to close its public hospital, etc. But that is not relevant to the story.)

Eventually I was assigned to the Board's Financial Committe, which was tasked with analyzing the Foundation's financial report (prepared by the Executive Director and lower staff) and issuing a recommendation for the full Board to vote on. (I was the "junior" member of the Commitee; the other two were the head of the Economics department, and the head of the Geology department, who had served before as financial provost of the University, overseeing a budget of half a billion dollars per year.)

However, the "financial report" we got from the Executive Director was a skimpy two-page summary with gross totals, but no details and no original supporting documents (invoices, receipts, payrolls, etc.). And with some rather dubious items to boot.

The three of us were rather uncomfortable about recommending approval of that report.  But we were told that the deadline was tight so there would be no time to ask for the missing details and documents.

Then we saw the recommendation letter that had been written by the previous incarnation of the Committee, for the previous year's report: "The undersigned Financial Committe has thoroughly examined the attached Financial Report, and hereby forwards it to the Board of Trustees to vote."   (Note the studied absence of the word "approved".)

Quite relieved, we copied that letter verbatim and sent it on to the Board with that "report".

A couple of days latter, the Committee was recalled and given a terse note from the Board's president, "You must rewrite your letter to say that you approved the Financial Report."  We sheepishly did that (he was also Vice-President of the University), but I quit the Committe and stopped going to the Board meetings after that.

I am telling you this story because it came to my mind while reading that statement by Bitstamp's auditor.  I wonder why... 

Oops, would you care to elaborate, please?  What part of it is "garbage"?  The order book summary?

(One complaint I have is that it uses my local time and date for display, but sumarizes traffic into UTC intervals; so the total for Mar/03 00:00-23:59 UTC, say, is labeled "Mar/02 21:00" on my screen.  Is that the problem?)

That does not change the fact that the report was not published; it only gives an excuse for it.

Banks don't have to be solvent in that sense, unfortunately.  However, they must keep a certain fraction in the central bank, and the government audits them (or should audit them) to make sure that they do.

Banks have extremely detailed internal accounting procedures, with multiple checks and records, to prevent their own staff from embezzling their money.  They may cheat on the government in many other ways, but AFAIK not by doctoring their books.

That is certainly the safest policy.  However an exchange could keep clients' EURs as USDs or treasury bons, for example,  without being technically insolvent.  Of course there would be a risk of it becoming insolvent if the currency rates change too fast in the wrong direction. If it did that with BTC x USD, that risk would be enormous; but that would not make it insolvent either.

To avoid those risks, clients should make sure that the company at least promises to keep their BTC as BTC, in the service contract. Which ones make such promise?

No, a real audit must include everything, otherwise it is worthless.  If the exchange has just enough funds to cover the cilent balances, but also owes 100 million USD to a bank, then it is insolvent.  The clients do not have priority over the bank, they are all creditors.


Depending on how the auditing was done, they did not even prove that they have access to the private keys.  Here is how the fictitious Bitscamex-e echange, which sold all their coins to Graball Investments, still "proved" to the auditor that they owned them.  (If half a billion dollars were at stake, I am sure much cleverer schemes could be set up.)

But who provided them with the client balances?  Presumably the exchange has a single database of account balances, without the extensive checks and redundancies that banks have.   It shouldn't be hard to "prune" such a database by leaving out inactive accounts with positive balance.  How would the auditor check whether the database is complete?
 

Read that sentence CAREFULLY and try figure out what it EXACTLY means; why they used those words, specifically,  and why the words are in that order. 

It may help to think what the auditor could say that he meant, if he were to be questioned in court after an eventual collapse of Bitstamp. 

Chinese Slumber Dinosaur prediction for Friday Mar/07

Prediction valid for: Friday 2014-03-07, 19:00--19:59 UTC (not before, not after)
Huobi's predicted price: 3899 CNY.
Bitstamp's predicted price: 637 USD.

Huobi

The red and green strokes are actual Huobi hourly prices.  The current prediction is the rightmost magenta rectangle.  The blue rectangle is the last prediction (see below), and the light blue-gray rectangles are the previous ones.  The orange and grey dots are the Slumber Points, the mean Huobi prices at 19:00 UTC every day.  Each point is a Glyptodon if the hourly volume V_h for 19:00--19:59 UTC is less than 0.005 times the daily volume 00:00--23:59 UTC; and is an Albertosaurus otherwise. The grey lines are trends fitted a posteriori to the Glyptodon Points. The orange line is the trend that was assumed for the prediction.

The Huobi prediction results from fitting a shifted decaying exponential p(d) = A+B*Q**(d-04), where d is the day of the month, to the last three Glyptodon Points --- namely 4040, 3956, and 3917 CNY on Mar/04--06.  The fitted coefficients are A = 3833.26, B = 156.74, and Q is 0.464.

Bitstamp

The red and green strokes are actual Bitstamp hourly prices.  The dots, dinosaurs, lines, and rectangles are Huobi's Slumber Points, dinosaurs, trends, and predictions, scaled by the currency conversion factor R (6.40 for Feb/07--09, 6.12 for all other times).

Checking the previous prediction

Prediction was posted on: Wednesday 2014-03-05, 22:56 UTC
Prediction was valid for: Wednesday 2014-03-06, 19:00--19:59 UTC

Huobi's predicted price: 3872 CNY
Huobi's actual price (L+H)/2: 3917 CNY
Error: 45 CNY (~7 USD)

Bitstamp's predicted price: 633 USD
Bitstamp's actual price (L+H)/2: 657 USD
Error: 24 USD

NOTE: D major

+1

An audit validates a financial statement.  Where is that statement?

To prove solvency, an exchange must basically show that (A+B)-(X+Y) is positive, or at least not too negative; where A and B its assets in BTC and national currencies, X and Y are the client account balances in BTC and national currencies, say converted at current prices; or, better than A-X is not negative, AND B-Y is not negative. (The math should include all assets and debts, including bank loans, but let's simplify for this discussion).

By moving the coins, Bitstamp "proved" that (in december) A = 194,933 BTC.  (It did not prove such thing actually; do I need to tell you why? But let's pretend it did.)

The letter from the auditor says that A-X is positive.  How did they get X?

When Antonopoulos "audited" Coinbase, he used the value of X that Coinbase gave him. (That is what I understood, and I cannot imagine how he could have got it except through them.  Correct me if I am wrong.)   

I have seen some audit reports before, including from the "inside", and I think I can tell when they are stretching the words to cover the holes.  What I read in that terse letter is that they verified A as above, but (like Antonopoulos) they trusted the value of X that Bitstamp provided them. 

The letter does not mention B and Y.

I give up.  We are not writing in the same language.

http://en.wikipedia.org/wiki/Financial_statement
http://en.wikipedia.org/wiki/Financial_statement#Audit_and_legal_implications

Cognitive dissonance is quite an euphemism.

One of those links (Coinbase) did not give that information.

The other one is a new exchange that is not even listed in the usual chart services.

(MtGOX too used to show balance sheets, IIRC the last one was in mid-2012.)

But again, before we continue this fruitless debate, can you explain what is your real point?  Do you have any connection to any of those exchanges?

Don't know, if posted already:

https://www.bitstamp.net/article/statemen-regarding-recent-third-party-audit-report/
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I see.  For you "audit" means a statement by the company that they have done an audit and everything was OK.   So it was only a misunderstanding on the meaning of that word, sorry.

Up one level.  Are you trying to argue that there is no risk that other exchanges will go MtGOX's way?

Was it not?

OK, so enlighten me: how many BTC does Bitstamp own, and how many does it owe its clients (i.e. what is the sum of the BTC balances of their clients' accounts)?  Ditto for BTC-e and Bitfinex.

I just got a call from a reporter of a local newspaper, he wanted to know more about the failures of the exchanges that are on the news.

I told him that I know nothing about bitcoin, except that some bitcoin investors are extremely agressive and will insult anyone who does not belive that bitcoin is the Messiah and everything it touched is gold.

(I am kidding of course.  I just told him a bit of what you all know, and the opinions I expressed here many times already.)

 

I affirmed that there were no audits, and that is a fact.  What Ver and Antonopoulos did were not audits (even Ver admitted that).  Saying that they were audits is a lie. 

Sorry, the joke was too good to pass. 

But you must at least agree that the audits of MtGOX by Ver and of Coinbase by Antonopoulos were pathetic, to put it mildly?

EDIT: removed the double spaces after punctuation.

Seriously now, the part of the article that made we wince was the comment by the guard when the reporter told them who the guy was.  I do not know why, but that detail flashed a yellow light in my mind...

The question is whether that reporter owns any bitcoin.  If she does, obviously we cannot trust her.  Her story would carry as much weight as Roger Ver's audit of MtGOX's finances. 

I suppose that the Real Satoshi may own other coins besides those, isn't that possible?

I don't know, I am guessing that because of this sudden drop in the price.

This drop apparently started in China, is that correct?

Is it confirmed in the blockchain that "Satoshi's coins" are being spent, or is that just a wild guess?