SEC Files Lawsuit Against Prager Metis, Accounting Firm for Auditor Independence Violations
The United States Securities and Exchange Commission (SEC) has initiated legal proceedings against accounting firm Prager Metis for allegedly violating auditor independence rules while providing services to cryptocurrency exchange FTX before its bankruptcy declaration. The SEC’s complaint, announced on September 29, claims that Prager Metis provided auditing services to its clients while concurrently offering accounting services, in violation of the auditor independence framework.
The SEC emphasizes the importance of keeping accounting and audit tasks separate to prevent conflicts of interest. However, it alleges that Prager Metis engaged in these intertwined activities for nearly three years. A statement from the SEC reads, “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.”
Although the statement does not name FTX or any specific clients, it indicates that there were allegedly “hundreds” of auditor independence violations throughout the three-year period in question. Notably, a previous court filing indicated that the FTX Group had enlisted Prager Metis to audit FTX US and FTX in 2021. FTX subsequently declared bankruptcy in November 2022. The filing argued that Prager Metis should have been aware that FTX would use its work to build public trust, given former FTX CEO Sam Bankman-Fried’s public announcement of previous FTX audit results.
Concerns about the accuracy of FTX audit reports had been raised previously. Current FTX CEO John J. Ray III expressed “substantial concerns” about the information presented in the audited financial statements during a January 25 bankruptcy court appearance. Senators Elizabeth Warren and Ron Wyden also raised doubts about Prager Metis’ impartiality, suggesting that the firm acted as an advocate for the crypto industry.
In a separate court filing on September 21, plaintiffs claimed that U.S.-based law firm Fenwick & West should share partial liability for FTX’s collapse due to exceeding the norms regarding its services offered to the exchange. Fenwick & West, however, asserts that it cannot be held responsible for a client’s misconduct as long as its actions remain within the boundaries of the client’s representation.
The legal action against Prager Metis and the ongoing investigation into FTX’s collapse highlight the importance of maintaining auditor independence and ensuring transparency in the cryptocurrency industry. As regulators continue to scrutinize the sector, enforcing compliance with financial and auditing standards becomes vital for investor protection.