SEC Takes Action Against Accounting Firm Tied to FTX's Bankruptcy Saga

The United States Securities and Exchange Commission (SEC) has initiated legal action against Prager Metis

by Faruk Imamovic
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SEC Takes Action Against Accounting Firm Tied to FTX's Bankruptcy Saga
© Getty Images News/Leon Neal

The United States Securities and Exchange Commission (SEC) has initiated legal action against Prager Metis, an accounting firm previously linked with the now-bankrupt cryptocurrency exchange, FTX. The lawsuit's foundation lies in allegations concerning the firm's breach of auditor independence principles.

Blurring the Lines Between Auditing and Accounting

On September 29, the SEC released a statement alleging that Prager Metis not only offered auditing services but also provided accounting services to the same clients. This simultaneous provision is in direct violation of the established auditor independence framework.

For clarity's sake, to avoid potential conflicts of interest, firms must distinctly separate their accounting and auditing tasks. Detailing the gravity of the situation, the SEC stated, “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”. Though the SEC's statement refrains from naming any specific clients, it does insinuate that Prager Metis committed hundreds of such violations over the said period.

The Shadows Cast by FTX's Bankruptcy

Digging into the past, a court document revealed that the FTX Group, prior to its bankruptcy, had solicited Metis's services for the audit of FTX US and its parent company, FTX, sometime in 2021.

The plot thickened in November 2022 when FTX filed for bankruptcy. The court document suggests that given the public announcement of FTX's audit results by its former CEO, Sam Bankman-Fried, Prager Metis should have foreseen that their audit would be leveraged to fortify public trust.

Raising even more eyebrows, the current CEO of FTX, John J. Ray III, expressed his reservations about the veracity of the information encapsulated within these audited financial statements when he appeared before a bankruptcy court on January 25.

Simultaneously, senators Elizabeth Warren and Ron Wyden questioned Prager Metis' impartiality. The senators debated that the accounting firm may be serving more as an advocate for the broader cryptocurrency industry rather than as an independent auditor.

To add another layer to this unfolding drama, an undisclosed law firm, which had also provided services to FTX, is reportedly under the microscope.

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