The former auditors of failed crypto giant FTX are settling allegations brought by the U.S. Securities and Exchange Commission (SEC) alleging that they violated audit standards.
A pair of related companies — Prager Metis CPAs, LLC and Prager Metis CPAs LLP — agreed to resolve allegations that they failed to comply with audit standards when they prepared audits on FTX without properly considering the risks posed by its relationship with crypto hedge fund Alameda Research LLC.
“The foundational failure to meet [audit standards] stemmed from the fact that the Prager Metis engagement partner fundamentally did not understand FTX, or the crypto asset markets in which it operated,” the SEC said in its complaint.
The biggest failing, the SEC alleged, was not appreciating the risks posed by FTX’s connection to Alameda Research, which was also controlled by FTX founder Sam Bankman-Fried.
“Despite the interconnected nature of the companies and the significant financial transactions between them, Prager Metis and the audit engagement team failed to adequately assess the risk of material misstatement presented by the FTX-Alameda relationship,” the regulator alleged.
Without admitting or denying the SEC’s findings, the firms settled separate charges of violating auditor independence rules and aiding FTX’s violations of securities rules.
In reaching those settlements, Prager Metis agreed to pay US$1.95 million — including US$1.75 million in penalties and US$200,000 in disgorgement — to engage an outside consultant to review its quality control policies, and to accept certain restrictions on accepting new clients.
The settlements are subject to court approval.
“Effective investor protection requires a collaborative approach that includes both regulators and gatekeepers such as auditors,” said Gurbir Grewal, director of the SEC’s enforcement division, in a release on Tuesday.
“To fulfill their role, auditors must, among other things, be independent, exercise due professional care and skepticism, and comply with all applicable professional standards. As we allege in these enforcement actions, Prager Metis fell short in all of these areas.”
These alleged failings meant that investors “lacked crucial protections when making their investment decisions” about dealing with FTX, Grewal noted.
He also said that the settlement aims to send a warning to audit firms.
“By limiting Prager’s ability to take on new business and by requiring it to retain an independent compliance consultant, today’s resolutions not only enhance investor protection, they also serve as a warning to audit professionals that are not appropriately meeting their gatekeeping obligations,” Grewal added.