The US Securities and Exchange Commission (SEC) has settled with audit firm Prager Metis, which has agreed to pay $1.95 million to resolve misconduct allegations related to its audits of the now-defunct cryptocurrency exchange FTX.
$745,000 Over FTX Audit Failures
On Tuesday, the SEC announced that Prager Metis and its California affiliate, Prager Metis CPAs, would pay a civil penalty of $745,000 as a part of the settlement.
Moreover, the firm will implement remedial measures, including hiring an independent consultant to review its audit and quality control policies. This settlement is pending court approval.
The SEC’s allegations revolve around Prager’s failure to stick to Generally Accepted Auditing Standards (GAAS) while conducting audits for FTX between February 2021 and April 2022.
The grievance indicates that Prager misrepresented its compliance with these standards, resulting in “significant deficiencies” in its auditing processes.
Specifically, the SEC said Prager didn’t adequately assess his ability to conduct the audit, particularly in regards to the alleged risks related to FTX’s relationship with Alameda Research, the trading arm of the defunct exchange.
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, emphasized auditors’ need to take care of independence and exercise skilled skepticism. He stated:
Effective investor protection requires a collaborative approach that features each regulators and gatekeepers reminiscent of auditors. To meet their role, auditors must, amongst other things, be independent, exercise due skilled care and skepticism, and comply with all applicable skilled standards. As we allege in these enforcement actions, Prager Metis fell short in all of those areas
Jorge G. Tenreiro, Acting Chief of the SEC’s Crypto Assets and Cyber Unit, added that the case serves as a warning to other auditors against “cutting corners” in compliance with legal obligations.
The pinnacle of the regulator’s Crypto and Cyber Unit reiterated the SEC’s commitment to investigating potential violations within the crypto space and ensuring accountability for many who compromise investor trust.
Prager Metis To Pay $1 Million For Indemnification Violations
In a related matter, Prager Metis also faced separate charges for violating auditor independence rules and aiding client violations of federal securities laws.
The SEC alleged that between December 2017 and October 2020, the firm “improperly” included indemnification provisions in engagement letters for over 200 audits, undermining its independence as required by federal law.
As a part of resolving these charges, the firm will incur combined civil penalties of $1 million, together with disgorgement and prejudgment interest totaling $205,000.
On the time of writing, FTX’s native token FTT is trading at $1.28, posting a minimum gain of 0.6%, while the broader crypto market is experiencing a more notable resurgence led by the market’s largest digital asset.
Featured image from DALL-E, chart from TradingView.com