Today, Bloomberg reports that Animoca Brands has lowered its target for its web3 fund, Animoca Capital, to $1 billion. In an interview with Nikkei in late November, Animoca said it was looking to raise between $1 and $2 billion to invest in blockchain and metaverse startups. By that stage, the shock of the FTX collapse had already hit home. Meanwhile, it was quietly revealed on New Year’s Eve that Animoca Brands had not filed its accounts for 2020.

“It is fair to say that it is a challenging market. But we have quite a bit of interest,” Yat Siu, co-founder of Animoca Brands, told Bloomberg. He said the FTX collapse hit a dozen companies in his portfolio hard, but that’s a fraction of his total portfolio.

Animoca Brands is already a prolific investor in the sector, saying it has backed 380 startups. It has some significant metaverse hits like The Sandbox and has invested in many major web3 and metaverse hits like Dapper Labs and Decentraland. There is no doubt that the company knows how to create and move fast.

However, if there is one thing that the FTX debacle demonstrates, it is that the ‘boring stuff’ is important, like proper accounting records, reporting and governance.

Before delving into the accounting issues, it’s worth noting that Animoca’s unaudited numbers before the May crash indicated strong returns. As of the end of April 2022, it had an investment portfolio valued at $1.5 billion, cash of $98 million, and third-party tokens worth $659 million. It also had $4.2 billion of its own affiliate tokens, which it (correctly) did not include on the balance sheet.

Not including its own tokens, despite a decline of more than 60% since May, the balance may now be worth close to the amount raised by investors, which is approaching $900 million, according to Crunchbase. If that’s the case, what’s the backlog with your accounts?

Several days ago, we asked Animoca for details about the cause of the delay, the accounting issues, and its current auditor, but received no response.

Animoca’s accounting challenges

On New Year’s Eve, a very quiet news time, TheBlock ran a favorable piece on Animoca’s latest accounting delay. Animoca was due to present the accounts for 2020 at the end of 2022 (already extremely late) and received permission to delay another three months, or almost two years late. In Australia, we believe the filing deadline for a company like Animoca Brands is four months after the end of the year.

This is just the latest of Animoca’s accounting challenges, including:

• Being delisted from the Australian Stock Exchange (ASX) for accounting reasons
• Repeated delay of account submission resulting in fines by ASIC regulator
• He previously fired Top 10 auditor Grant Thornton
• The replacement auditor is small but affiliated with a larger network
• Animoca is in the habit of referring to the larger network as auditors

The last published accounts of Animoca Brands were for 2019, three years ago. Since then, it has raised more than $750 million.

The 2019 accounts were audited by DFK Collins, which is a subsidiary of DFK International. However, DFK Australia and New Zealand comprise 14 independent firms, so Animoca’s auditor is small.

Our Linkedin research last year showed six DFK Collins employees, and this year it shows just three, two of whom have the same last name. This is in no way a criticism of DFK Collins. However, Animoca is no longer a small company. For auditors to be truly independent, it is ideal that there is a match between the size of the auditor and that of the audited firm to avoid the risk of audit fees influencing decisions.

Animoca’s repeated delays could now work against it because many auditing firms have withdrawn from the cryptocurrency sector, and affiliates will come under the spotlight for their crypto work. After the FTX crash, several cryptocurrency exchanges began posting proof of reserves that were falsely presented as audits. If accountants damage their reputation with crypto audits, this affects the credibility of most of their work, which is not related to crypto. Hence the withdrawals. And the likely increased scrutiny from affiliates like DFK Collins.

That is not to say that crypto accounting is very easy. It’s not. Animoca avoided putting its own tokens on its balance sheet in 2019. FTX was a textbook example of what can go wrong if you do. Adding to the house of cards is the problem of falsely attributing the market price of a small number of tokens in circulation to a much larger number of restricted tokens held by the issuer.

However, if Animoca managed to publish the 2019 audited results (in July 2022), the principles should be the same for 2020 and 2021, although the activity during those periods was very prolific.