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Lawsuit of the week: Blockchain company goes to court after accounting firm quits on eve of filing deadline

Company seeks damages agains MNP and principal for “holding themselves out as having specialized expertise in cryptocurrency auditing, which they did not”
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Vancouver-based cryptocurrency firm DMG Blockchain Solutions Inc. is suing MNP LLP, claiming the accounting firm abruptly resigned as the company’s auditor a day before a filing deadline after allegedly being spooked by a guidance document released by the Canadian Public Accountability Board in 2018.

DMG Blockchain Solutions filed a notice of civil claim in BC Supreme Court on January 27, naming MNP and partner Andrea Brown as defendants. According to the lawsuit, DMG went public on the Toronto Stock Exchange after a reverse merger deal in February 2018. In the fall of that year, the company began seeking out an accounting firm to audit its consolidated financial statements due in January 2019. The company claims MNP courted the company at an industry conference in September 2018.

“Most accounting firms at this time were not providing auditing services to cryptocurrency companies given that cryptocurrency was a novel industry,” the claim states. “MNP expressed to DMG that it had specialized expertise in cryptocurrency auditing.”

After MNP presented an “Audit Service Plan,” DMG retained the firm to audit the company’s financials in advance of a filing deadline of Jan. 29, 2019.

But in December 2018, the Canadian Public Accountability Board, the regulator of Canadian public accounting firms, released “a guidance document highlighting issues that auditors should consider when performing audits for cryptocurrency companies.”

“The guidance document had the effect of scaring auditors like MNP away from working with cryptocurrency companies,” the claim states.

In the weeks after, MNP resigned as auditor for three other publicly traded cryptocurrency firms, and allegedly dropped DMG as a client the day before its annual filing were due “without any advance warning.”

Meanwhile, the auditing firm’s fees exceeded $100,000, more than double the price quoted in the original audit plan, DMG claims. Due to the accounting firm’s resignation, DMG missed the deadline to file its annual statements, leading to cease trade orders imposed on the company by both the BC Securities Commission and the Ontario Securities Commission. Weeks later, DMG appointed a new auditor. It filed its annual statements in May 2019. Both the B.C. and Ontario securities commissions lifted the cease trade orders in August 2019 after reviews found nothing in need of rectification.

DMG Blockchain seeks damages for breach of fiduciary duty, professional negligence and breach of contract against MNP and Brown for “holding themselves out as having specialized expertise in cryptocurrency auditing, which they did not.”

DMG’s allegations have not been tested or proven in court and MNP and Brown had not filed responses to the claim by press time.