ZIP 1014: auditing requirements

[zookozcash]

We would like to get clarity on the wording in the section on transparency requirements. It currently says “Annual audited financial report (IRS Form 990, or substantially similar information).”. We are unclear on the intent of using this word “audited”.

Financial Audited Reports are very different things from disclosures like IRS Form 990. Audited Financial Reports are not normally used for organizations like ECC or Zfnd. They are normally used with much bigger organisations, and even then only when there is a specific certification imposed by an external authority requiring an audit attestation. We could define and implement auditing of our transparency disclosures for the purpose of public disclosure instead of an audit opinion, but we should be aware that this is almost never done. Financial Audits for an organization like ours is not a typical process, and it would require work to define scope.

It would also be costly. We estimate $25k – $70k annually to pay the auditor itself (e.g. Ernst & Young, Price Waterhouse Cooper, or someone), combined with additional internal accounting resource inside ECC needed to prepare for an audit, — we estimate $35k – $50k on top of our existing accounting spend. Estimated annual costs could be $60k – $120k, or (assuming a coin price of $30/ZEC) 3000 – 4000 ZEC coins. This would of course mean those coins aren't available to fund our intended initiatives in support of Zcash, which are already severely underfunded at the current coin price. This also doesn’t count the ongoing opportunity cost of having ECC working on accounting to the level that a large, publicly-traded company would do, as opposed to spending more time working on Zcash initiatives.

So, it’s a trade-off. On the plus side, auditing of financial disclosures may provide more reliable numbers, and it provides more detailed — or at least different — accounting breakdowns compared to IRS Form 990 or our existing tradition of publishing regular Transparency Reports (https://electriccoin.co/blog/tag/transparency/). The biggest value that auditing provides is a chance of detecting error or misstatement on the part of ECC itself — that’s why the third-party auditor is required to inspect the books and provide the attestation.

On the other hand, it might not be the best bang for the buck of the community’s finite resources. Other practices — for example use of taddresses on the blockchain for the Dev Fund distributions, ECC’s Transparency Reports, or converting ECC to a non-profit that is obligated to file IRS Form 990 disclosures — may provide more of the kind of transparency and accountability that the community wants.

The final factor is that ZIP-1014 currently says that this requirement applies to “ECC, ZF, and Major Grant recipients (during and leading to their award period)”. ECC — given somewhere between 35% and 50% of the Dev Fund — could satisfy this requirement (although at a cost in terms of having less resource and bandwidth available to further our initiatives). But, it would be prohibitive for most or all Major Grant recipients, and the existence of the requirement would deter potential contributors from applying for the Major Grants.

Here are the options we see:

The simple option: remove the word “audited”. Other techniques are better-suited for the kind of transparency and accountability that the community requires, such as use of taddresses, IRS Form 990 disclosures, ECC Transparency Reports, potentially converting ECC into a non-profit, the transparency requirements and the enforcement mechanisms described elsewhere in ZIP-1014 and in my personal forum post (https://forum.zcashcommunity.com/t/community-sentiment-polling-results-nu4-and-draft-zip-1014/35560/243) etc.
Require audited financials from ECC and Zfnd (and expect that it will take many months to set that up and then there will be an ongoing overhead cost to support it going forward which will detract from their other operations), but not from Major Grant recipients. Continue to require other kinds of transparency from Major Grant initiatives.

Okay, that’s it. We at ECC are hugely in favor of transparency. We’ve always practiced extreme transparency in every way that we can, we will continue to do so, and we will absolutely satisfy this auditing requirement if that is a condition that the community requires as part of us receiving Dev Fund money. However, we think the community should consider what “auditing” and “Financial Audit Report” implies and make an informed decision about whether that’s the best use of resources. And, it would definitely be a fatal flaw to require it from Major Grant recipients.

Finally, whether or not the auditing requirement stays in place, we believe that the community as a whole should also spend time and resources refining and improving other, more “crypto native” transparency and accountability processes. Auditing can mean different things and can be helpful against a few specific risks, but it is not a silver bullet that would address all of the transparency and accountability requirements that we want as a community, and it doesn’t take advantage of possible “crypto native” techniques. So we as a community should plan to continue to invest time and resources in those other techniques for transparency and accountability as well.

[tromer]

I find these arguments compelling, and am fine with removing the word "audited" to avoid its excessively costly implications. I think the remaining accountability mechanisms, including the contractual and reputational ones, and ultimately the possibility of forks, are adequate.

Thanks, @zookozcash and ECC, for the detailed rationale.

[acityinohio]

Thanks @zookozcash and @tromer — I also don't have a problem with removing "audited" given this rationale, however I think it's reasonable (for both the ECC and ZF but not Major Grant recipients) to provide at least the level of transparency/details provided by an IRS Form 990. If the ECC converts to a nonprofit it's a non-issue, but if they don't having that included in the ZIP is a good backstop transparency requirement.

Given that, we may have to modify the wording somewhat there but I think we should do so for ZIP 1015 (aka "future modified ZIP 1014") after the latest round of Helios votes. (I suspect the ZIP editors would like to keep ZIP 1014 as written for historical preservation)

[acityinohio]

Based on this comment from @daira on the forums I realize my assumption about the ZIP editors was perhaps wrong and I'd be happy to open a PR here.

[daira]

[Wearing ZIP editor hat] ZIP 1014 is still at a phase where this kind of edit can be made (assuming that people are given reasonable time to read the edits before the poll). I'll open a PR.

[daira]

@acityinohio and @zookozcash , please review #315.