SEC Charges FTX Auditor Prager Metis Over Independence Violations

On September 29, 2023, the Securities and Exchange Commission (SEC) announced legal charges against the international accounting firm Prager Metis CPAs, LLC and its Californian counterpart, Prager Metis CPAs LLP (jointly referred to as Prager), for alleged violations of auditor independence rules and for supposedly aiding and abetting their clients in breaching federal securities laws. The complaints pointed to improper conduct over approximately three years, from December 2017 to October 2020, during which Prager was alleged to have included indemnification clauses in engagement letters for more than 200 audit-related assignments, thereby compromising its independence as required by federal securities laws.

Prager’s alleged misconduct involved repeatedly signing engagement letters with indemnification clauses and issuing “accountant’s reports” purporting independence, despite senior partners being notified that such actions jeopardized the firm’s independence. The SEC complaint suggests that many of Prager’s clients incorporated these “accountant’s reports” in their SEC filings, and accuses Prager of not advising its clients about these violations even after being informed by the Public Company Accounting Oversight Board (PCAOB) that such actions were in violation of federal laws concerning auditor independence.

The SEC’s action against Prager gains additional significance considering the firm’s prior engagement with cryptocurrency exchange FTX before the latter filed for Chapter 11 bankruptcy in November 2022. Prager Metis provided audit and tax preparation services to FTX, a notable engagement revealed in earlier court documents. Although the SEC’s complaint did not specifically name FTX, it highlighted “hundreds” of auditor independence violations over a span of nearly three years.

The case underscores the stringent auditor independence framework that prevents an auditor from providing additional services that might pose a conflict of interest. Eric I. Bustillo, Director of the SEC’s Miami Regional Office, emphasized the importance of auditor independence in safeguarding financial reporting integrity and fostering public trust.

The SEC’s complaint seeks a permanent injunction, disgorgement plus prejudgment interest, and a civil monetary penalty against Prager, marking a stern reminder for auditing firms about the critical importance of adhering to federal laws and regulations concerning auditor independence.

Furthermore, the legal scrutiny extends beyond Prager Metis. A recent filing on September 21 revealed that the law firm Fenwick & West, which had previous engagements with FTX, is also under investigation. The plaintiffs argue that Fenwick & West should be held partially responsible for FTX’s downfall due to alleged over-extension in service offerings to the exchange.

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