The United States Securities and Exchange Commission (SEC) has taken legal action against Prager Metis, an accounting firm that had provided services to cryptocurrency exchange FTX before its bankruptcy declaration. In a statement released on September 29, the SEC accused Prager Metis of offering auditing services to its clients without maintaining the necessary independence, as it continued to provide accounting services. This violation of the auditor independence framework is prohibited to prevent conflicts of interest.
The SEC claimed that this entwined practice of handling both accounting and audit tasks occurred over a period of approximately three years. The complaint emphasized the importance of auditor independence in protecting investors. Although the statement did not specifically mention FTX or any other clients, it mentioned that there were allegedly “hundreds” of auditor independence violations throughout the three-year period.
Additionally, a previous court filing highlighted that the FTX Group had engaged Metis to audit FTX US and FTX at some point in 2021. Following this engagement, FTX declared bankruptcy in November 2022. The filing argued that since former FTX CEO Sam Bankman-Fried publicly announced the previous FTX audit results, Metis should have recognized that its work would be used by FTX to enhance public trust.
Concerns regarding the material presented in FTX audit reports were previously reported. FTX’s current CEO, John J. Ray III, expressed substantial concerns about the information presented in these audited financial statements during a bankruptcy court hearing on January 25.
Senators Elizabeth Warren and Ron Wyden also expressed concerns about Prager Metis’ impartiality, suggesting that the firm acted as an advocate for the crypto industry. They questioned the quality of the auditor’s oversight in light of the FTX debacle.
In a separate case, Fenwick & West, a law firm that provided services to FTX, has also faced scrutiny. Plaintiffs alleged that Fenwick & West should be partially held responsible for FTX’s collapse as it allegedly went beyond the norm in its service offerings to the exchange. However, Fenwick & West argued that it cannot be held accountable for a client’s misconduct as long as its actions remain within the bounds of the client’s representation.
These legal proceedings against Prager Metis and the scrutiny faced by Fenwick & West highlight the importance of maintaining independence and impartiality in the financial and legal services provided to cryptocurrency exchanges. As the crypto industry continues to evolve, regulatory bodies and stakeholders must ensure that auditing and accounting practices adhere to strict standards to protect investors and promote trust in the market.
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