Accounting firm Prager Metis has agreed to settle with Securities and Exchange Commission (SEC) charges of misconduct related to audits of the now-defunct crypto exchange FTX.
According to a Sept. 17 announcement, the firm will pay $745,000 in penalties to settle to resolve two actions. The SEC claims that Prager misrepresented compliance with auditing standards and failed to assess risks tied to FTX’s connection with its sister hedge fund, Alameda Research. The final agreement is subject to court approval.
The regulator alleges that Prager issued two audit reports for FTX between February 2021 and April 2022 that falsely represented they met Generally Accepted Auditing Standards (GAAS). The company failed to follow GAAS and its own policies by not determining whether it had the competence and resources to conduct the audits on FTX.
According to the complaint, the regulator charged Prager with negligence-based fraud. The company neither admitted nor denied the findings, said the SEC, agreeing to pay a $745,000 civil penalty and take remedial actions, including retaining an independent consultant to review and evaluate its audit, review, and quality control policies and procedures, and adhering to certain restrictions regarding the acceptance of new audit clients.
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“Effective investor protection requires a collaborative approach that includes both regulators and gatekeepers such as auditors. To fulfill their role, auditors must, among other things, be independent, exercise due professional care and skepticism, and comply with all applicable professional standards. As we allege in these enforcement actions, Prager Metis fell short in all of these areas,” said in an announcement Gurbir Grewal, director of the SEC’s division of enforcement.
According to Grewal, because Prager’s audits of FTX were conducted without due care, investors “lacked crucial protections when making their investment decisions,” he continued:
“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.”
FTX, once one of the largest crypto exchanges, collapsed in November 2022 due to a severe liquidity crisis and allegations of fraud. The downfall was triggered by revelations that FTX had been using its native token, FTT, as collateral to back risky loans, mainly to its sister company, Alameda Research.
When FTT’s value plummeted, the exchange faced a massive gap in customer funds, leading to a run on withdrawals it could not cover. The company filed for bankruptcy, and Sam Bankman-Fried — its founder and CEO — was convicted of fraud in November 2023.
“Once more we see an entity, lured by the siren song of the crypto asset markets, cutting corners on its obligations to comply with the law. As we have seen time and time again, these shortcuts do not pay,” said Jorge Tenreiro, the SEC’s acting chief of Crypto Assets and Cyber unit.
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