The United States Securities and Exchange Commission (SEC) has initiated legal proceedings against an accounting firm and FTX Auditor, Prager Metis. This firm was previously engaged by the now-bankrupt cryptocurrency exchange FTX. The allegations revolve around hundreds of violations related to auditor independence, according to a statement released on September 29.
Auditor Independence Framework Violations: SEC’s Claims
The SEC contends that Prager Metis provided auditing services to its clients while lacking the necessary independence. Moreover, the firm continued to offer accounting services simultaneously. This practice is explicitly prohibited under the auditor independence framework.
The statement emphasizes the alleged existence of “hundreds” of auditor independence violations spanning a three-year period. However, it did not explicitly name FTX or other clients.
FTX’s Engagement with Prager Metis and Bankruptcy Declaration
A previous court filing highlighted the involvement of Prager Metis in auditing FTX US and FTX at some point in 2021. Notably, FTX declared bankruptcy in November 2022. The filing suggests that Prager Metis should have anticipated the use of its work to bolster public trust. This is considering former FTX CEO Sam Bankman-Fried’s public announcement of previous FTX audit results.
FTX Audit Reports and Impartiality Issues
Previous concerns about the content presented in FTX audit reports have been noted. On January 25, current FTX CEO John J. Ray III expressed substantial concerns about the information presented in audited financial statements during a bankruptcy court hearing.
Senators Elizabeth Warren and Ron Wyden also raised concerns about Prager Metis’ impartiality. They argued that it functioned as an advocate for the crypto industry.
Legal Ramifications
In a separate development, a law firm that provided services to FTX, Fenwick & West, faces allegations in a September 21 court filing. Plaintiffs claim that the U.S.-based law firm should be held partially liable for FTX’s collapse. They further asserted that it exceeded the norm in its service offerings to the exchange.
Fenwick & West, however, maintains that it cannot be held accountable for a client’s misconduct as long as its actions remain within the bounds of the client’s representation.
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