The Securities and Exchange Commission (SEC) has filed a complaint accusing Prager Metis – the former auditing firm for collapsed crypto exchange FTX – of violating auditor independence rules.
The SEC alleges Prager Metis entered agreements with clients, including over 60 SEC-regulated entities, that improperly absolved the firm of legal liability and expenses related to potential intentional company misstatements.
Though not directly related to FTX, the charges come after Prager Metis audited FTX’s international division in 2021. The SEC said it warned the firm about the problematic liability releases as early as January 2019.
SEC: Prager Breached Rules on Auditor Independence
Auditor independence requirements are fundamental to accurate financial reporting and protecting investors.
But the SEC claims Prager Metis violated these standards through liability waiver clauses with clients, including crypto companies, that shielded the firm from accountability for its audit work.
By agreeing to these terms, the SEC said Prager “thereby breached its responsibilities to serve the public interest, including the requirement that it maintain independence from its audit clients.”
The SEC is seeking court orders to prevent Prager from further violations, secure financial penalties, and force the firm to forfeit any profits earned through the allegedly unlawful waiver clauses.
Links to Collapsed Crypto Firm FTX
While not the focus of the complaint, the charges against Prager Metis draw attention because of its prior auditing work for FTX.
Last November, as FTX neared collapse, it was reported Prager conducted an audit of FTX’s international operations which showed it generated $1 billion in 2021 revenue.
But when FTX filed for bankruptcy weeks later, it revealed a massive $8 billion hole in its accounts.
The time gap between Prager’s seemingly clean review and FTX’s insolvency filing raised questions around the quality of the firm’s audits, although no direct allegations have surfaced.
The SEC’s charges now further tarnish Prager Metis’ reputation as regulators probe the FTX debacle. Robust auditing standards are vital for crypto’s path to maturity. For investors relying on financial reporting, the risks posed by lax auditors require urgent attention as industry reforms unfold.