The United States Securities and Exchange Commission (SEC) has taken legal action against accounting firm Prager Metis for allegedly providing auditing services to cryptocurrency exchange FTX without maintaining the necessary independence. According to the SEC’s statement on September 29th, Prager Metis violated the auditor independence framework by offering accounting services while also auditing its clients.
The SEC’s complaint emphasizes the importance of auditor independence in protecting investors. The agency alleges that Prager Metis’s audits, reviews, and exams fell short of fundamental principles over the course of nearly three years. While the SEC’s statement does not explicitly mention FTX or any other clients, it suggests that there were hundreds of auditor independence violations during this period.
The legal action against Prager Metis comes after FTX declared bankruptcy in November 2022. A previous court filing highlighted that FTX Group engaged Metis to audit FTX US and FTX in 2021. The filing claimed that Metis should have recognized that FTX would use its work to bolster public trust, especially considering former FTX CEO Sam Bankman-Fried had publicly announced previous audit results.
Concerns about the material presented in FTX audit reports had previously been reported. Current FTX CEO John J. Ray III expressed substantial concerns about the information presented in the audited financial statements during a bankruptcy court hearing in January. Additionally, Senators Elizabeth Warren and Ron Wyden raised concerns about Prager Metis’ impartiality, arguing that it functioned as an advocate for the crypto industry.
Furthermore, Fenwick & West, a law firm that provided services to FTX, is facing allegations of fraudulent activity in a court filing. Plaintiffs in the filing argue that Fenwick & West should be held partially liable for FTX’s collapse because it exceeded the norm with its service offerings to the exchange. However, Fenwick & West 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.
Overall, these legal proceedings highlight the importance of independence and impartiality in the auditing and legal services provided to cryptocurrency exchanges. As the crypto industry faces increased scrutiny and regulation, maintaining transparency and trust in financial reporting and legal practices is crucial for investor protection and the stability of the market.
