FTX Relied on Inadequate Financial Controls Across Multiple Apps, According to Court Filings

According to a court filing by FTX CEO John Ray III in a Delaware Bankruptcy Court, the cryptocurrency exchange was run by three individuals who lacked experience and were fresh out of college. These individuals relied on an inconsistent system of online shared documents and communication across multiple apps to manage the exchange’s multi-billion dollar business.

The filing reveals that FTX had extensive control failures, including a lack of appropriate financial and accounting controls, an inadequate group management structure, and poor record-keeping processes. The exchange apparently used a mix of Google documents, Slack communications, shared drives, and excel spreadsheets to manage its assets and liabilities. Ray’s restructuring team has identified these deficiencies and is working to improve FTX’s control systems. The court filing provides the first detailed account of the internal control failures at FTX, which is a concerning revelation for investors and clients of the exchange.

FTX, the cryptocurrency exchange, reportedly used QuickBooks for accounting, which is designed for small to medium-sized businesses and not suitable for a company that operates across multiple continents and platforms.

As a result, FTX’s bookkeeping was neglected, with around 80,000 unprocessed accounting entries left in catch-all QuickBooks accounts titled “Ask My Accountant.” The co-founders, Sam Bankman-Fried and Gary Wang, along with former engineering director Nishad Sing, had the final say in significant decisions, despite their limited experience, according to CEO John Ray III.

An unnamed FTX executive noted that if Singh or Wang were unable to continue in their roles, the whole company would be in trouble. FTX was unable to provide a complete list of its employees at the time of bankruptcy filing in November, and the exchange failed to file its financials on time at the end of reporting periods. Brett Harrison, the president of FTX.US, raised concerns with Bankman-Fried and Singh regarding the lack of appropriate delegation of authority, formal management structure, and key hires at FTX.US. These revelations are worrying for investors and clients of the exchange, highlighting significant control failures and deficiencies in the company’s management and record-keeping processes.

After Brett Harrison raised concerns about the lack of appropriate delegation of authority and formal management structure at FTX.US, his bonus was significantly reduced, and he was instructed to apologize to Sam Bankman-Fried by the firm’s internal counsel, which he refused to do.

Harrison reportedly resigned following the disagreement. FTX’s CEO, John Ray III, stated in a court filing on Feb. 6 that when he took control of the exchange in November, there was no list of anything related to bank accounts, income, insurance, or personnel, which caused a massive scramble for information.

However, Ray pushed back against the motion to assign an independent examiner to the bankruptcy case out of fear that inadvertent errors could result in the destruction of hundreds of millions of dollars in value. These developments further highlight the control failures and deficiencies in FTX’s management and record-keeping processes, and raise concerns about the exchange’s ability to recover from its current financial difficulties.

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