Prager Metis, an accounting firm, has agreed to pay $745,000 to settle charges brought by the U.S. Securities and Exchange Commission (SEC) over misconduct related to its audits of the collapsed crypto exchange FTX.
The SEC alleges that Prager Metis misrepresented its compliance with Generally Accepted Auditing Standards (GAAS) during two audits conducted between February 2021 and April 2022. The firm reportedly failed to assess the risks linked to FTX’s ties with Alameda Research, its sister hedge fund. The settlement also includes a requirement for Prager Metis to hire an independent consultant to review its audit and quality control policies. The agreement is pending court approval.
According to the SEC, Prager Metis did not demonstrate due professional care or maintain independence as required by auditing standards. Gurbir Grewal, Director of the SEC’s Division of Enforcement, criticized the firm for falling short of its gatekeeping responsibilities, stating that the firm’s failure meant investors lacked crucial protections. The settlement imposes restrictions on Prager Metis, including limitations on accepting new audit clients.
FTX, once a major player in the crypto industry, collapsed in November 2022 following a liquidity crisis and allegations of fraud. It was revealed that FTX had been using its own token, FTT, as collateral for risky loans, leading to a massive shortfall in customer funds when FTT’s value dropped. This resulted in a run on withdrawals and the company’s subsequent bankruptcy. FTX founder Sam Bankman-Fried was convicted of fraud in November 2023.
The SEC’s action against Prager Metis serves as a warning to audit firms to uphold their professional standards and maintain rigorous compliance practices in the rapidly evolving crypto sector.