FTX Auditor In Hot Water As SEC Initiates Legal Action

Table of Contents

• Prager Metis In Hot Water 
• Violations Add Up 
• FTX And Prager Metis 

The United States Securities and Exchange Commission (SEC) has initiated legal action against FTX’s auditor, alleging hundreds of violations by the firm. 

The SEC has alleged that Prager Metis, an accounting firm hired by bankrupt crypto exchange FTX in 2021, did not exhibit the necessary independence when providing services to clients. 

Prager Metis In Hot Water 

The Securities and Exchange Commission released a statement on the 29th of September, alleging that Prager Metis, an accounting firm, had provided auditing services to clients without maintaining the necessary independence as it continued to offer accounting services. Under the auditor independence framework, this practice is prohibited. 

“The Securities and Exchange Commission today announced charges against accounting firm Prager Metis CPAs, LLC and its California professional services firm, Prager Metis CPAs LLP, (together, Prager) for violating auditor independence rules and for aiding and abetting their clients’ violations of federal securities laws.”

The practice is prohibited to prevent a situation where any potential conflict of interest could arise. This is why accounting and auditing tasks are mandated to be kept separate. However, according to the Securities and Exchange Commission, Prager Metis ignored the mandate and intertwined both activities for three years. Eric I. Bustillo, the Director of the SEC’s Miami Regional Office, stated, 

“Auditor independence is critical to both protecting the integrity of financial reporting and promoting public trust. As alleged in our complaint, over a period of nearly three years, Prager’s audits, reviews, and exams fell short of these fundamental principles. Our complaint is an important reminder that auditor independence is crucial to investor protection.”

Violations Add Up 

In its complaint, the Securities and Exchange Commission stated that from December 2017 to December 2020, Prager Metis added indemnification provisions improperly in engagement letters for over 200 audits, reviews, and exams. As a result, the firm failed to exhibit the necessary independence from clients for those engagements. The firm is also accused of signing accounting reports when purported to be independent in connection with its exams and audits. 

The Securities and Exchange Commission also pointed out that the firm failed to advise its clients about its violations, despite the Public Company Accounting Oversight Board (PCAOB) informing the firm about the indemnification provisions that were in breach of the independence requirements of federal securities laws. Prager Metis was also called out by Senators Elizabeth Warren and Ron Wyden, who alleged a lack of independence when performing audits of cryptocurrency companies. Both Senators alleged that the firm acted as an advocate for crypto. They also noted that the firm had audited FTX and given the now-bankrupt exchange a clean bill. 

FTX And Prager Metis 

The statement by the Securities and Exchange Commission does not mention FTX or any other firm clients. However, it states there were hundreds of alleged violations throughout the three-year period. A previous court filing had also highlighted the fact that the FTX group engaged the firm in 2021. FTX declared bankruptcy in 2022. According to the filing, former FTX CEO Sam Bankman-Fried publicly announced previous FTX audits and results. As such, Prager Metis should have recognized that FTX would use its work to bolster public trust in the exchange. 

Several concerns were flagged about the material presented in the FTX audit. On the 25th of January, John J. Ray III, the current CEO of FTX, told a bankruptcy court that he had concerns about the information presented in the exchange’s audited financial statements. The law firm that provided services to FTX was also named in a court filing on the 21st of September. According to the filing, the firm, Fenwick & West, must be held partially liable for the collapse of FTX. This is because it exceeded the norm regarding its service offerings to the exchange. 

However, the law firm stated it could not be held accountable for misconduct by its clients as long as its actions remain within the ambit of client representation.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.