SEC files charges against former FTX auditor Prager Metis over independence violations

The U.S. SEC has filed charges against global accounting firm Prager Metis CPAs for a multitude of alleged auditor independence violations and purportedly contributing to its clients’ breaches of federal securities laws.

Prager Metis served as the auditor for the now-bankrupt cryptocurrency exchange FTX Group 2021, and current FTX CEO John Ray III has previously expressed significant apprehensions about the validity of information in the audits conducted by the firm.

However, the violations mentioned in the filings reportedly spanned from December 2017 to October 2020, and the SEC has not directly mentioned FTX in the filing.

Prager Metis told Reuters in a statement that it intends to “vigorously defend itself in court.” The firm added:

“These allegations arise solely from template indemnification language used several years ago that was never enforced or sought to be enforced, and the SEC does not allege this language affected the quality of our audits.”

Alleged Violations

The SEC claims that Prager Metis incorporated indemnification provisions in engagement letters in over 200 audits, reviews, and exams — a practice that reportedly compromises auditor independence according to federal securities laws.

The regulator wrote in the filing:

“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.”

These provisions were allegedly continued, despite senior partners at Prager Metis being alerted that such inclusion impaired their independent status. Many of these reports were included in filings with the SEC, and Prager Metis allegedly neglected to inform its clients of the violations.

U.S. Senators Elizabeth Warren and Ron Wyden have also aired worries regarding Prager Metis’ objectivity, speculating that the firm acted more as an advocate for the crypto industry rather than maintaining impartiality.

Legal Implications

The SEC’s legal complaint, lodged in the U.S. District Court for the Southern District of Florida, is seeking a permanent injunction, disgorgement plus prejudgment interest, and a civil monetary penalty against Prager Metis for the alleged violations.

The ongoing investigation by the SEC underscores the agency’s commitment to maintaining the integrity of financial reporting and enforcing auditor independence to bolster public trust.

The case is a reminder of the crucial role of auditor independence in securing investor protection and maintaining the reliability of financial disclosures, especially in industries such as cryptocurrency, which are under increased scrutiny.

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