SEC Initiates Legal Action Against FTX’s Auditor

SEC initiates legal action against Prager Metis, FTX’s previous auditor.

The United States Securities and Exchange Commission (SEC) has initiated legal proceedings against the accounting firm Prager Metis. Prager Metis provided services to crypto exchange FTX before it declared bankruptcy.

In a statement made on September 29, the SEC alleged that the accounting firm Prager Metis provided audit services to its clients without maintaining the necessary independence, all the while continuing to provide accounting services. This practice is prohibited under the auditor’s independence framework.

Accounting and auditing responsibilities must be kept separate to prevent conflicts of interest. However, SEC alleges that these combined activities went on for about three years: “As alleged in our complaint, Prager’s audits and reviews fell short of the basic principles over nearly a three-year period. Our complaint serves as an important reminder of the importance of auditor independence for investor protection.”

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Although the statement didn’t explicitly mention FTX or other customers, it emphasized that there were “hundreds” of violations related to auditor independence over the alleged three-year period.

Additionally, earlier, concerns regarding the content of FTX audit reports had been raised.

On January 25, FTX’s current CEO John J. Ray III told the bankruptcy court that they had serious concerns about the information presented in these audited financial statements.

Senators Elizabeth Warren and Ron Wyden also expressed their concerns about Prager Metis’ impartiality. They argued that the company was acting as an advocate for the crypto industry.

At the same time, a recent accusation targeted a law firm serving FTX.

In a separate September 21 court filing, it was argued that US-based law firm Fenwick & West shares partial liability for FTX’s collapse due to their extensive services to the exchange.

Fenwick & West claims no liability for client’s actions within representation bounds.

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