The accounting firm Prager Metis has become the target of legal action by the United States Securities and Exchange Commission (SEC) for its prior services to FTX exchange.
The SEC’s claims revolve around the accounting firm’s engagement with the now bankrupt FTX in 2021, asserting that Prager Metis committed numerous violations concerning auditor independence.
SEC’s Announcement Regarding Prager Metis
In a statement released September 29, the SEC accused Prager Metis of conducting auditing services for clients without maintaining the required independence, which contradicts the established auditor independence framework and is prohibited.
The SEC stated that for three years, the firm failed to maintain a clear separation between accounting and audit functions. To mitigate conflicts of interest, it is essential to maintain a clear separation between the two.
“As alleged in our complaint, over a period of nearly three years, Prager’s audits, reviews, and exams fell short of these fundamental principles. Our complaint is an important reminder that auditor independence is crucial to investor protection.”
Prager’s alleged wrongdoing consisted of a recurring pattern of signing engagement letters containing indemnification clauses and providing “accountant’s reports” that claimed independence. This occurred despite senior partners being made aware that such actions posed a threat to the firm’s independence.
The SEC’s complaint implies that a significant number of Prager’s clients integrated these “accountant’s reports” into their SEC filings. Additionally, Prager is accused of failing to inform its clients about these violations even after receiving notifications from the Public Company Accounting Oversight Board (PCAOB) that such actions were in violation of federal laws governing auditor independence.
The recent statement by the SEC doesn’t directly name FTX or any specific clients, but it underscores the existence of what is claimed to be numerous instances of auditor independence violations spanning a three-year period.
FTX Audit Reports
The SEC’s enforcement action against Prager becomes even more noteworthy due to the firm’s prior involvement with FTX exchange, which dates back to before FTX’s Chapter 11 bankruptcy filing. Prager Metis had provided audit and tax preparation services to FTX, which is a significant engagement disclosed in earlier court records.
FTX subsequently filed for bankruptcy in November 2022.
The filing further alleged that since former FTX CEO Sam Bankman-Fried had publicly disclosed previous audit results conducted by Metis, the accounting firm should have been aware that FTX intended to use its work to enhance public trust.
Significant concerns had been raised regarding the content of audit reports associated with FTX.
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Other Reactions to the Audit Reports
On January 25, John J. Ray, the current CEO of FTX, expressed “substantial concerns” about the information presented in these audited financial statements. He also added that he “did not believe it [would be] appropriate for stakeholders or the court to rely on the audited financial statements.”
In addition to this, Senators Elizabeth Warren and Ron Wyden stated their concern about the impartiality of Prager Metis, suggesting that the firm appeared to be a supporter for digital asset exchanges.
Simultaneously, there have been recent developments regarding a law firm that provided services to FTX. In a court filing dated September 21, plaintiffs have alleged that the U.S.-based law firm Fenwick & West should bear partial responsibility for FTX’s collapse, contending that it exceeded the customary scope of its service offerings to the exchange.
However, Fenwick & West maintains that it cannot be held liable for the misconduct of a client as long as its actions fall within the boundaries of the client’s representation.
