International accounting firm Prager Metis has agreed to pay $745,000 to settle misconduct allegations from the U.S. Securities and Exchange Commission (SEC) tied to its bungled audit of FTX before its collapse in November 2022.
The settlement, announced Tuesday, also included a resolution to a second SEC investigation into Prager Metis, which accused the firm of violating auditor independence rules in the audits of over 200 companies between 2017 and 2020. Prager Metis agreed to pay $1.2 million in civil penalties and pre-judgment interest to settle those charges. The settlement is subject to court approval.
The SEC’s complaint accused the accounting firm of negligence-based fraud. In the two audit reports Prager Metis produced for FTX in 2021 and 2022, the SEC alleges that the firm falsely represented that the audits were compliant with Generally Accepted Auditing Standards (GAAS), when in fact, the firm “fail[ed] to comply with GAAS in multiple aspects of the audit.”
According to the SEC, Prager Metis essentially got in over its head with FTX, “not adequately assessing whether it had the competency and resources to undertake the audit” of the crypto exchange.
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“In its rush to accept FTX as an audit client, Prager Metis assembled an engagement team that collectively lacked the competence, experience, and knowledge to appropriately conduct the audits,” the complaint stated. “From this initial failure flowed a series of other auditing failures … The most significant deficiency was Prager Metis’s failure to understand FTX’s relationship with Alameda Research LLC and the pivotal role Alameda played in FTX’s business.”
In addition to the monetary penalties, Prager Metis agreed to permanent injunctions and remedial actions, including retaining an independent consultant to review and evaluate its auditing and quality control policies, as well as “certain restrictions on accepting new audit clients.”
“Because Prager’s audits of FTX were conducted without due care, for example, FTX investors lacked crucial protections when making their investment decisions. Ultimately, they were defrauded out of billions of dollars by FTX and bore the consequences when FTX collapsed,” said Gurbir S. Grewal, Director of the SEC's Division of Enforcement, in a press statement.
“By limiting Prager’s ability to take on new business and by requiring it to retain an independent compliance consultant, today’s resolutions not only enhance investor protection, they also serve as a warning to audit professionals that are not appropriately meeting their gatekeeping obligations,” Grewal added.
Prager Metis did not return CoinDesk’s request for comment.