FTX Auditor Settles with SEC

The U.S. Securities and Exchange Commission (SEC) announced on Tuesday that Prager Metis. The former auditor for the now-defunct crypto exchange FTX, has agreed to a $1.95 million settlement. This agreement resolves allegations of negligence-based fraud related to Prager Metis’s relationship with FTX, as well as violations of auditor independence rules dating back to 2017.

SEC’s Allegations Against Prager Metis

Prager Metis penned two auditing reports for FTX, the exchange co-founded and once run by Sam Bankman-Fried. The SEC’s complaint stated that the auditing team “lacked the competence, experience, and knowledge to appropriately conduct the audits.” The regulator added that Prager Metis “fundamentally did not understand FTX” or its relationship with Alameda Research, FTX’s sister trading firm.

Settlement Details and Implications

Under the settlement, a $745,000 civil penalty applies to the FTX violations. While just over $1.2 million will be paid for violating auditor independence rules. Prager Metis has also agreed to retain an independent consultant to review its auditing policies and faces restrictions on accepting new clients.

The SEC criticized Prager Metis’s auditing procedures, stating they “largely excluded Alameda” and failed to assess misleading materials provided by FTX. Additionally, the auditor didn’t thoroughly investigate after FTX disclosed it had loaned funds to Alameda Research. According to the SEC, under generally accepted accounting standards, Prager Metis shouldn’t have accepted FTX as a client.

FTX’s Collapse and Aftermath

FTX collapsed in November 2022, leading to significant turmoil in the crypto industry. Alameda Research was found to have secretly used billions of dollars of customer funds from FTX. While Sam Bankman-Fried has been arrested and is awaiting trial, he has pleaded not guilty to multiple fraud charges. His trial is scheduled to begin in October 2023.

Regulatory Scrutiny Intensifies

This settlement underscores the increasing regulatory scrutiny over auditing practices in the crypto industry. Last year, Senator Elizabeth Warren expressed disappointment with the Public Company Accounting Oversight Board’s failure to oversee auditors like Prager Metis. She wrote that “shady audits play [a role] in giving crypto firms a veneer of safety and financial stability.”

When John J. Ray took over as CEO of FTX, he highlighted issues with the company’s bookkeeping. Testifying on Capitol Hill in 2022, he stated that Alameda and FTX had “virtually no internal controls and no separateness whatsoever,” using basic accounting software like QuickBooks for multi-billion-dollar firms.

The $1.95 million settlement between Prager Metis and the SEC serves as a cautionary tale for auditing firms working with crypto companies. As regulatory bodies tighten oversight, auditors must ensure they have the necessary expertise to evaluate complex crypto businesses. This development also signals a growing emphasis on accountability and transparency in the rapidly evolving crypto landscape.