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It's not only for "security". As soon as you are not running fractional reserve on crypto you are not lowering the price of it. It's ok to me if every (or any, for starters) exchange is forced to proof they hodl the real btc balance. And as I said, it could also be complemented with a bank balance certificate of FIAT funds in the "traditional" way.
See my edit above
Yes, I do also agree that completely auditing the FIAT part is not really possible. Fraud would be always possible, but it is avoiding fractional reserve banking in crypto what it is possible to avoid. I am only interested that they do have the BTC/other crypto they claim to have to avoid the negative influence in price the contrary would have. Of course, they could be hacked next day and the users would lose the (crypto) funds but it would be (publicly) detected inmediately (at next blockchained balance or absence of it) so the point is not to guanratee the funds are "safe"... just that they really hodl it, until they don't.
It is not a cure all solution, but something like the mtgox case would have been avoided/mitigized.
There's not point in trying to avoid fractional reserve banking in something (FIAT) which is already highly fractional reserve banked. It is not as if everyone (including exchanges) could simply withdraw their theoretical bank balances into cash. We don't even know what percentage of it is "real" for each FIAT currency.
But it would/should be possible in crypto. Unless.... what if the exchanges are already running some kind of fractional reserve? We will never know until they implement the simple proof of crypto reserves system.
it ain't not bad at all down here 
