FTX’s Accounting Firm Prager Metis to Pay SEC $1.95M to Settle Negligence Allegations

On Tuesday, a resolution was reached in the case against Prager Metis, which also addressed a separate SEC investigation. This second probe alleged that the firm breached auditor independence rules during audits of approximately 200 companies from 2017 to 2020. To settle these allegations, Prager Metis has agreed to pay $1.2 million in civil penalties and pre-judgment interest. The settlement is pending court approval.

The Securities and Exchange Commission’s lawsuit claims that the accounting firm was guilty of fraud due to negligence. According to two audit reports prepared for FTX in 2021 and 2022, the SEC asserts that the firm misrepresented that the audits adhered to standard auditing practices (Generally Accepted Auditing Standards – GAAS). However, it is alleged that the firm actually failed to comply with these standards in several areas of the audit process.

Based on SEC reports, Prager Metis may have bitten off more than they could chew when auditing FTX, failing to thoroughly evaluate if they possessed the necessary expertise and capabilities for such an audit task.

The lawsuit alleges that, in their eagerness to take on FTX as a client for audit work, Prager Metis put together a team that collectively was not equipped with the necessary expertise, experience, or understanding to perform the audits effectively. This initial mistake led to a chain of other auditing errors … The most glaring issue identified was Prager Metis’s failure to comprehend FTX’s relationship with Alameda Research LLC and the crucial part Alameda played in FTX’s operations.

Apart from facing monetary fines, Prager Metis also consented to long-term limitations and corrective measures. These include hiring an external expert to scrutinize and assess their auditing and quality control procedures, along with some constraints on taking on new audit clients.

In a press release, Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, stated that Prager’s examination of FTX was careless, leaving investors without essential safeguards as they made their investment decisions. As a result, these investors lost billions of dollars when FTX deceived them and eventually went bankrupt. In other words, the investors suffered the fallout of FTX’s collapse due to being defrauded by the company.

Grewal stated that the recent decisions, which include restricting Prager from acquiring new business and mandating an independent compliance consultant, will strengthen investor security. Furthermore, these actions can be seen as a caution to auditors who fail to fulfill their monitoring responsibilities adequately.

Prager Metis did not return CoinDesk’s request for comment.