FTX Auditing Scandal: Prager Metis Settles with SEC for $1.95 Million

• The U.S. Securities and Exchange Commission (SEC) has reached a settlement with audit firm Prager Metis involving a monetary penalty of $1.95 million.
• The settlement resolves two charges alleging misconduct by Prager Metis in auditing the now-defunct cryptocurrency exchange FTX.
• The SEC claims Prager Metis filed misleading audit reports and failed to comply with generally accepted auditing standards (GAAS).

SEC Settles with Audit Firm Prager Metis Over Misconduct Allegations Related to FTX

Prager Metis Faces SEC Allegations Over FTX Audits

The SEC accused Prager Metis of submitting two audit reports that inaccurately represented FTX’s financial health and failed to adhere to GAAS between February 2021 and April 2022. This came to light following the collapse of FTX, which was once a leading cryptocurrency exchange. The catalyst for the downfall was a significant wave of customer withdrawals driven by concerns over the exchange’s liquidity, particularly its heavy reliance on illiquid altcoins.

Failures in Auditing Standards and Disclosure

According to the SEC, Prager Metis not only misrepresented FTX’s financial condition but also failed to disclose critical risk factors. One major oversight was neglecting to highlight the increased risk associated with FTX’s relationship with Alameda Research, a trading firm also founded by Sam Bankman-Fried. This lack of transparency was a pivotal factor in the downfall of FTX, culminating in Bankman-Fried’s conviction on seven fraud-related charges and a 25-year prison sentence, from which he plans to appeal.

Inadequacies in Professional Conduct by Prager Metis

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, emphasized that auditors must maintain independence, exercise professional care, and follow all relevant professional guidelines to fulfill their roles effectively. In the case of Prager Metis, the SEC alleges substantial shortcomings in these areas. Specifically, Prager Metis reportedly failed to ensure they had the necessary competency and resources for a thorough and independent audit of FTX, compromising the integrity of their findings.

Consequences and Settlement Terms

As part of the settlement, Prager Metis agreed to pay a combined total of $1.95 million. This amount includes a $1 million penalty and a $205,000 disgorgement, along with additional monetary components subject to court approval. The company also acknowledged its shortcomings in a public statement, underscoring the importance of adhering to auditing standards and internal policies.

Conclusion

The SEC’s action against Prager Metis highlights the critical role that auditors play in maintaining market integrity, particularly in the volatile cryptocurrency sector. This case serves as a reminder of the stringent standards that firms must uphold to protect investor interests and maintain public trust.