KEY POINTS
- The SEC alleged that Prager Metis failed to maintain independence while providing auditing and accounting services to FTX
- The agency warned accounting firms in July against doing business with non-compliant crypto businesses
- The SEC’s legal action against Prager Metis came a few days ahead of Sam Bankman-Fried’s Oct. 4 trial
Just a few days away from the criminal trial of the disgraced crypto mogul Sam Bankman-Fried (SBF), the U.S. Securities and Exchange Commission (SEC) started its legal proceedings against accounting firm Prager Metis, which provided accounting services to the now-defunct crypto exchange FTX.
The major Wall Street regulator charged the international accounting firm with violating auditor independence rules as well as “aiding and abetting” its clients for violating federal securities laws.
“The Securities and Exchange Commission today announced charges against accounting firm Prager Metis CPAs, LLC and its California professional services firm, Prager Metis CPAs LLP, (together, Prager) for violating auditor independence rules and for aiding and abetting their clients’ violations of federal securities laws,” the regulator said in a press release on Sept. 29.
The SEC alleged that while the accounting firm provided auditing services to FTX, it failed to maintain the necessary independence since it supposedly continued offering accounting services to the same business — a practice prohibited in the auditor independence framework.
“Auditor independence is critical to both protecting the integrity of financial reporting and promoting public trust,” SEC’s Miami Regional Office Director Eric Bustillo said.
“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,” the director added.
Filed in the U.S. District Court for the Southern District of Florida, the complaint asks the court for the accounting firm’s “permanent injunction, disgorgement plus prejudgment interest and a civil monetary penalty.”
In July, the financial regulator alerted accounting firms and cautioned them against doing business with non-compliant crypto businesses.
“Certain crypto asset trading platforms, with others in the crypto industry, have marketed to investors their retention of third parties, sometimes accounting firms, to perform some sort of review of certain parts of their business, often presented as a purported ‘audit,'” the financial watchdog said via its chief accountant, Paul Munter.
The SEC accounting chief also explained that accounting firms could be held liable for their own statements as well as those of their clients.
Accounting firms made headlines at some point last year when the crypto empire FTX spectacularly imploded.
The collapse propelled several crypto exchange platforms to hire accounting firms to come up with their proof-of-reserves to assure crypto investors that their funds were safe.
In an article titled “Accounting’s Big Lie — and How to Fix It” published in October 2022, David Hilzenrath, lead enterprise and investigative reporter at Project on Government Oversight, noted that “the audit firms are not independent.”
“The audit firms are chosen and paid by the companies they audit. Just as the company hires its auditor, the company has the power to fire its auditor,” he said.
The SEC’s legal action against Prager Metis came a few days ahead of the criminal trial of Bankman-Fried, which is scheduled to take place on Oct. 4.
