The SEC has taken legal action against Prager Metis, an accounting firm that previously served cryptocurrency exchange FTX before it declared bankruptcy. The SEC alleges that Prager Metis committed numerous auditor independence violations, including conducting audits for its clients without maintaining the required level of independence while simultaneously offering accounting services.
These violations allegedly occurred over approximately three years, and the SEC claims that they fell short of the fundamental principles of auditor independence. The SEC’s complaint is an important reminder that auditor independence is crucial to investor protection.
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While the SEC’s statement doesn’t explicitly mention FTX or any other clients, it does emphasize that there were allegedly “hundreds” of auditor independence violations throughout the three-year period. Moreover, an earlier legal document pointed out that in 2021, the FTX Group enlisted Prager Metis to conduct an audit of both FTX US and FTX.
Following this, FTX filed for bankruptcy in November 2022. The bankruptcy filing asserted that given former FTX CEO Sam Bankman-Fried’s public disclosure of previous FTX audit findings, Prager Metis should have anticipated that FTX would leverage their work to enhance public confidence. Concerns were previously reported about the material presented in FTX audit reports.
Meanwhile, a law firm that provided services to FTX has recently faced scrutiny. In a court filing dated September 21, the plaintiffs claim that Fenwick & West, a U.S.-based law firm, should share partial responsibility for FTX’s downfall because it allegedly exceeded the standard scope of its services to the exchange. However, Fenwick & West maintains that it cannot be held responsible for a client’s wrongdoing as long as its actions fall within the boundaries of its representation of the client.
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The SEC’s action against Prager Metis is a significant development in the FTX saga. It remains to be seen how the case will unfold, but it is clear that the SEC is taking auditor independence violations seriously.