The SEC, the US regulator of securities markets, has filed a lawsuit against Prager Metis, an accounting firm that worked with FTX, a crypto exchange that went bankrupt in 2022.
The SEC accused Prager Metis of violating the rules of auditor independence, which require auditors to avoid any conflicts of interest with their clients. The SEC said that Prager Metis did not follow these rules, as it also provided accounting services to its clients while auditing them. This is not allowed under the auditor independence framework.
The SEC said that this problem lasted for almost three years, and affected hundreds of audits, reviews, and exams that Prager Metis conducted for its clients. The SEC stated: “Our complaint alleges that Prager’s audits, reviews, and exams did not meet these basic standards for nearly three years. Our complaint reminds everyone that auditor independence is essential for investor protection.”
The SEC did not name FTX or any other clients in its statement, but it stressed that there were many instances of auditor independence violations in the three-year period. However, a court document from earlier this year revealed that FTX Group hired Metis to audit FTX US and FTX in 2021, before FTX filed for bankruptcy in November 2022.
The document claimed that Metis should have known that FTX would use its audit results to gain public confidence, as FTX's former CEO Sam Bankman-Fried had announced them publicly.
There were also doubts about the accuracy of the audit reports that FTX presented. On Jan. 25, FTX's current CEO John J. Ray III told a bankruptcy court that he was “very worried about the information in these audited financial statements.”
In addition, Senators Elizabeth Warren and Ron Wyden questioned Prager Metis' objectivity. They said that it acted as a supporter of the crypto industry. At the same time, a law firm that served FTX has also faced criticism lately. In a court document from Sept. 21, some plaintiffs said that Fenwick & West should share some responsibility for FTX's failure, because it allegedly went beyond its normal role as a service provider to the exchange.
But Fenwick & West denied this, saying that it was not liable for any wrongdoing by its client, as long as it acted within the scope of its representation.
