Prager Metis, the accounting firm responsible for auditing the now-defunct FTX crypto exchange, has reached a settlement with the Securities and Exchange Commission (SEC) to pay $745,000 in civil penalties for alleged misconduct. This settlement comes after the SEC brought forward allegations of repeated violations by the auditor in connection with its audits of FTX.
In addition to the $745,000 settlement, Prager Metis has agreed to pay an additional $1.2 million for a separate regulatory investigation into auditor independence rule violations. This investigation focused on audits conducted between 2017 and 2020 for over 200 companies. The penalties include $1 million in civil fines and $205,000 in recovery and interest.
The SEC’s complaint against Prager Metis specifically points out negligence-based fraud in two audit reports for FTX, one from 2021 and another from 2022. The auditor falsely claimed that the audits were conducted in line with Generally Accepted Auditing Standards (GAAS), but failed to adhere to the framework in various aspects of the audit, as well as its own policies and procedures. The SEC also noted that the auditor did not establish the connection between FTX and its sister crypto hedge fund, Alameda Research.
Director of the SEC’s Division of Enforcement, Gurbir Grewal, emphasized the importance of auditors being independent, exercising due professional care and skepticism, and complying with professional standards. He stated, “As we allege in these enforcement actions, Prager Metis fell short in all of these areas.”
FTX’s downfall came in November 2022 when it filed for bankruptcy with a valuation of $32 billion. The collapse was attributed to the questionable practices of its founder and former CEO, Sam Bankman-Fried, who commingled customer funds with business funds. Bankman-Fried was convicted on seven counts of fraud and conspiracy and received a 25-year prison sentence. His legal team has since appealed the conviction and requested a new trial.
Grewal pointed out that Prager Metis’ negligent audits of FTX deprived investors of crucial protections, leading to billions of dollars in losses when the exchange collapsed. The repercussions of FTX’s demise serve as a cautionary tale about the importance of thorough and accurate auditing practices in the financial industry.