FTX Control Error | Blockchain News
FTX, a multi-billion dollar cryptocurrency company, has faced control failures due to inadequate financial and accounting controls, an inadequate corporate governance structure and the use of software not suitable for large corporations, according to CEO John Ray III. In an April 2021 court hearing, Ray detailed the deficiencies his restructuring team had identified at FTX.
Ray noted that FTX relied on a plethora of Google Docs, Slack communications, shared drives and Excel spreadsheets to manage its assets and liabilities. The company used QuickBooks for its bookkeeping, which Ray said was designed for small and medium-sized businesses and not for a company that operates across multiple continents and platforms like FTX. As a result, about 80,000 transactions were left as unprocessed accounting records in “catch-all QuickBooks accounts titled ‘Ask My Accountant.’
According to Ray, FTX was run by three inexperienced people “not long out of college” who controlled almost every important aspect of the company. Co-founders Sam Bankman-Fried and Gary Wang, along with former director of engineering Nishad Sing, had the “final vote in all important decisions” despite their limited experience. An unnamed FTX executive noted that “if Nishad got hit by a bus, the whole company would be finished. Same problem with Gary.”
It was also reported that FTX failed to submit its financial statements on time at the end of financial reporting periods and did not perform back-end checks to identify and correct material errors. In addition, the company could not provide a complete list of its employees at the time of the bankruptcy filing in November.
Brett Harrison, the president of FTX.US, raised concerns about “the lack of appropriate delegation of authority, formal management structure and key hires at FTX.US.” But when Harrison voiced his concerns to Bankman-Fried and Singh, his bonus was significantly reduced and he was told to apologize to Bankman-Fried by the firm’s in-house counsel. Harrison refused and resigned after the disagreement.
Ray stated that when he took control of FTX in November, there was “not a single list of anything” related to bank accounts, income, insurance or personnel, causing a “massive scramble for information.” He also pushed back against the proposal to assign an independent examiner to the bankruptcy case, fearing that “inadvertent mistakes” could lead to “hundreds of millions of dollars in value being destroyed.”
In conclusion, FTX’s control failure was due to a lack of appropriate financial and accounting controls, an inadequate group management structure and the use of software that was not suitable for large companies. Inexperienced founders controlled the company, and it relied on a multitude of electronic shared documents and communications.
