Prager Metis Settles with SEC Over FTX Audit Misconduct Charges
Details of the Settlement
The settlement, announced on September 17, is pending court approval and stems from charges that Prager Metis did not adhere to Generally Accepted Auditing Standards (GAAS) during its audits of FTX conducted between February 2021 and April 2022. The SEC highlighted that the firm failed to ensure it possessed the necessary competence and resources to undertake these audits effectively.
As part of the resolution, Prager Metis has agreed to implement several remedial actions. These include the engagement of an independent consultant to review and assess the firm’s audit, review, and quality control policies and procedures. Additionally, Prager Metis will face restrictions on accepting new audit clients to prevent future violations.
While Prager Metis has neither admitted nor denied the SEC’s findings, the agreed-upon civil penalty and corrective measures mark a crucial step in addressing the lapses identified by the regulator.
Regulatory Scrutiny and Investor Protection
Gurbir Grewal, Director of the SEC’s Division of Enforcement, emphasized the importance of auditors in safeguarding investor interests. He stated, “Effective investor protection requires a collaborative approach that includes both regulators and gatekeepers such as auditors. To fulfill their role, auditors must, among other things, be independent, exercise due professional care and skepticism, and comply with all applicable professional standards. As we allege in these enforcement actions, Prager Metis fell short in all of these areas.”
The SEC’s actions against Prager Metis underscore the critical role of audit firms in providing accurate and reliable information to investors, particularly in the high-stakes environment of cryptocurrency markets.
The Downfall of FTX
The case against Prager Metis is part of broader regulatory and legal scrutiny following the collapse of FTX in November 2022. FTX, once a leading player in the crypto exchange arena, filed for bankruptcy after a liquidity crisis and allegations of misusing customer funds and other fraudulent activities. The crisis was precipitated by the plummeting value of its native token, FTT, which was reportedly used as collateral for risky loans, primarily to its affiliate, Alameda Research.
The fallout from FTX’s collapse has had widespread implications across the crypto industry, leading to increased calls for enhanced regulatory frameworks to govern the sector.
Implications for the Audit Sector
The SEC’s enforcement action against Prager Metis serves as a cautionary tale for audit firms engaged in the crypto sector, stressing the need for stringent adherence to auditing standards and ethical practices. Jorge Tenreiro, the SEC’s acting chief of Crypto Assets and Cyber unit, remarked on the case, stating, “Once more we see an entity, lured by the siren song of the crypto asset markets, cutting corners on its obligations to comply with the law. As we have seen time and time again, these shortcuts do not pay.”
For further insights into the implications of this case and other related developments, readers might find interest in the ripple effects of FTX’s subsidiary sales and the broader demand for crypto lawyers post-regulation.
