The SEC has accused Prager Metis CPAs, a global accounting firm, of violating auditor independence rules and contributing to its clients’ violations of federal securities laws.
Current FTX CEO John Ray III, who has raised concerns about the reliability of the firm’s audit work, has called into question Prager Metis, the now-defunct FTX Group’s 2021 auditor.
While the SEC’s allegations against Prager Metis span from December 2017 to October 2020, the SEC has not explicitly mentioned FTX in its filings.
In response to the SEC’s allegations, Prager Metis issued a statement to Reuters stating that it would “vigorously defend itself in court.” The firm further stated:
“These allegations arise solely from template indemnification language used several years ago that was never enforced or sought to be enforced, and the SEC does not allege this language affected the quality of our audits.”
According to the SEC, Prager Metis included indemnification provisions in more than 200 engagement letters for audits, reviews, and examinations. Federal securities laws prohibit such provisions, as they may create a conflict of interest for the auditor and compromise its independence.
The SEC’s filing states:
“As alleged in our complaint, over nearly three years, Prager’s audits, reviews, and exams fell short of these fundamental principles. Our complaint is an important reminder that auditor independence is crucial to investor protection.”
Even after senior partners became aware that this practice impeded the firm’s independence, Prager Metis continued to include indemnification provisions in its engagement letters. The firm allegedly failed to inform its clients of the issue despite noting these violations in filings with the SEC.
U.S. Senators Elizabeth Warren and Ron Wyden have raised questions about Prager Metis’ independence and impartiality, speculating that the firm acted more as an advocate for the crypto industry than as an objective and unbiased auditor.
The SEC has filed a lawsuit against the firm in the U.S. District Court for the Southern District of Florida, seeking a permanent injunction to prevent Prager Metis from continuing to engage in activities that violate auditor independence rules. The SEC is also seeking disgorgement of any ill-gotten gains, as well as prejudgment interest and civil monetary penalties.
However, In light of the SEC’s ongoing investigation, it is clear that the agency is committed to upholding financial reporting standards and protecting the public’s trust by taking a firm stance against violations of auditor independence.
The case demonstrates that ensuring the integrity of financial disclosures, particularly in emerging and innovative industries like cryptocurrency, relies on maintaining auditor independence. Without independent auditors, compromised financial reporting quality may put investors at risk.
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