FTX Audit Failures Cost Prager Metis $1.2M in SEC Settlement

• The international accounting firm Prager Metis has agreed to resolve charges by the U.S. Securities and Exchange Commission (SEC) related to its audit of FTX prior to its collapse, paying $745,000.
• This settlement also covers a secondary SEC investigation, which accused Prager Metis of violating independence rules in audits of over 200 firms between 2017 and 2020.
• The firm will pay a total of $1.2 million in penalties and pre-judgment interest, pending court approval, to resolve these allegations.

Prager Metis resolves SEC charges related to its FTX audit with a $745,000 settlement, while also settling additional accusations with a $1.2 million fine.

SEC Charges and Settlement Agreement

The SEC’s complaint against Prager Metis alleges negligence and fraudulent misconduct in the firm’s audits of FTX for the years 2021 and 2022. Although Prager Metis claimed its auditing conformed to General Accepted Auditing Standards (GAAS), the SEC found multiple deviations from these standards. This settlement marks a significant development in the aftermath of the FTX scandal, as regulatory bodies continue their scrutiny of financial institutions involved with the collapsed cryptocurrency exchange.

Allegations of Auditing Standards Violations

The SEC’s investigation extended beyond the FTX audits, implicating Prager Metis in over 200 audits conducted between 2017 and 2020. The commission accused the accounting firm of failing to adhere to crucial independence rules, which are designed to ensure unbiased and objective audit results. Prager Metis has acknowledged these lapses and agreed to pay a penalty of $1.2 million in addition to the settlement for the FTX case. The firm is also required to review and possibly overhaul its audit and quality control policies under the guidance of an independent consultant.

Concerns Over Competence in FTX Audit

The SEC’s critique of Prager Metis extended to the competency and resource adequacy of their team handling the FTX audits. The regulatory body pointed out that Prager Metis failed to adequately evaluate whether their team possessed the necessary experience and resources to audit FTX effectively. This misjudgment was compounded by the firm’s insufficient understanding of FTX’s business relationship with Alameda Research LLC, a significant player in FTX’s operational framework. This oversight raised questions about the firm’s thoroughness and accountability.

Implications for Future Audits

In response to the SEC’s findings, Prager Metis has committed to implementing several remedial measures. These include retaining an independent consultant to review their audit policies and imposing stricter guidelines for accepting new audit clients. These steps are aimed at ensuring higher standards of audit quality and compliance in the future. The outcomes of this case highlight the increasing regulatory demands on accounting firms, especially those dealing with intricate and high-stakes sectors like cryptocurrency.

Conclusion

The resolution of SEC charges against Prager Metis underscores the ongoing efforts to uphold stringent audit standards and protect investors. By agreeing to significant financial penalties and committing to policy reviews, Prager Metis aims to restore its credibility and prevent future lapses. This case serves as a crucial reminder for audit firms about the importance of maintaining independence and rigor in their auditing practices, especially when dealing with complex financial entities such as cryptocurrency exchanges.