Prager Metis Agrees to $1.95M Settlement with SEC Over FTX Audit Failures
In a significant development for the cryptocurrency industry, accounting firm Prager Metis has reached a $1.95 million settlement with the U.S. Securities and Exchange Commission (SEC) to resolve allegations of misconduct related to its audits of the now-defunct crypto exchange FTX.
The SEC announced on Tuesday that Prager Metis agreed to pay $745,000 to settle charges of negligence-based fraud stemming from its audits of FTX between February 2021 and April 2022. The regulator alleges that Prager Metis issued two audit reports for FTX that falsely represented compliance with Generally Accepted Auditing Standards (GAAS).
According to the SEC’s complaint, Prager Metis failed to adequately assess whether it had the competency and resources to undertake the audit of FTX. This initial failure led to a series of other auditing deficiencies, most notably the firm’s inability to understand the relationship between FTX and Alameda Research, a crypto hedge fund controlled by FTX’s former CEO Sam Bankman-Fried.
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, stated, “Because Prager’s audits of FTX were conducted without due care, FTX investors lacked crucial protections when making their investment decisions. Ultimately, they were defrauded out of billions of dollars by FTX and bore the consequences when FTX collapsed.”
The settlement, which is subject to court approval, includes permanent injunctions and remedial actions. Prager Metis has agreed to retain an independent consultant to review and evaluate its audit, review, and quality control policies and procedures. The firm will also face certain restrictions on accepting new audit clients.
In addition to the FTX-related charges, the SEC settlement also resolves separate allegations of auditor independence rule violations by Prager Metis between December 2017 and October 2020. For these violations, the firm agreed to pay an additional $1.2 million in civil penalties and disgorgement with prejudgment interest.
This settlement comes in the wake of FTX’s dramatic collapse in November 2022, which sent shockwaves through the cryptocurrency industry. The exchange’s founder, Sam Bankman-Fried, was recently sentenced to 25 years in prison after being convicted on fraud charges related to FTX’s mismanagement.
The SEC’s action against Prager Metis underscores the regulator’s ongoing efforts to enforce compliance and protect investors in the rapidly evolving cryptocurrency space. It also serves as a stark reminder of the crucial role auditors play as financial gatekeepers and the consequences of failing to meet professional standards in high-stakes audits.
As the cryptocurrency industry continues to mature, this case highlights the need for robust auditing practices and heightened scrutiny of financial statements in the digital asset sector. It remains to be seen how this settlement will impact future audits of cryptocurrency exchanges and whether it will lead to more stringent oversight of auditors operating in this space.
