SEC Sues FTX’s Auditor Over Auditor Independence Violations

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Key Takeaways

  •  SEC alleged that Prager Metis provided auditing services to its clients without maintaining the necessary independence 
  • SEC state that there were allegedly “hundreds” of auditor independence violations throughout the three-year period.

The United States Securities and Exchange Commission (SEC) has filed a lawsuit against Prager Metis, an accounting firm, alleging violations of auditor independence rules in its provision of services to cryptocurrency exchange FTX before the exchange’s declaration of bankruptcy.

In a statement issued on September 29, the SEC asserts that Prager Metis provided auditing services to clients while failing to maintain the necessary independence, in violation of the auditor independence framework.

Specifically, the SEC accuses Prager Metis of improperly adding indemnification provisions to engagement letters for over 200 audits and other work conducted between December 2017 and October 2020. According to the SEC, these provisions prevented the firm from complying with the legal requirements for auditor independence.

Prager Metis responded to the SEC’s legal action with a statement affirming its commitment to independence from clients and pledging to “vigorously defend itself” in court. The firm emphasized that the allegations stemmed from the use of template indemnification language several years ago, which was never enforced or utilized to impact the quality of their audits. Prager Metis reiterated its dedication to upholding its independence obligations.

While the SEC’s complaint mentions that Prager Metis was one of the auditors for the FTX Group, it is important to note that the allegations do not pertain directly to the FTX case. FTX, a cryptocurrency exchange, filed for bankruptcy in late 2022, and its founder, Sam Bankman-Fried, along with key executives, faces allegations of involvement in a sweeping fraud scheme. Bankman-Fried’s trial is set to commence in the coming week.

The SEC’s legal action against Prager Metis, filed against Prager Metis CPAs and its professional services firm, was submitted to the U.S. District Court for the Southern District of Florida. As part of its efforts to address the alleged violations, the SEC seeks an injunction, penalties, and other remedies, and the investigation into Prager Metis remains ongoing.

The issue central to this matter is the separation of accounting and audit tasks to prevent conflicts of interest. The SEC underscores the importance of auditor independence in safeguarding investor protection. While the SEC’s statement does not explicitly mention FTX or any other specific clients, it emphasizes that the alleged violations of auditor independence spanned approximately three years and involved “hundreds” of instances throughout that period.

Moreover, previous revelations indicated that Prager Metis had been engaged to audit FTX US and FTX at some point in 2021. This has raised questions regarding the reliability of the audit reports, especially after former FTX CEO Sam Bankman-Fried publicly cited previous FTX audit results, potentially using them to bolster public trust.

Additional concerns were previously raised about the material presented in FTX audit reports, with the current FTX CEO, John J. Ray III, expressing substantial concerns about the information contained in those audited financial statements. Senators Elizabeth Warren and Ron Wyden also voiced apprehensions about Prager Metis’ impartiality, suggesting that it functioned as an advocate for the crypto industry.

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Saniya Raahath
Saniya Raahath

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