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Prager Metis Pays $1.95 Million for FTX Auditing Failures

Governance | Sep 25, 2024

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Prager Metis Settle $1.95M SEC Fine Over FTX Audits

The collapse of FTX in November 2022 exposed major supervisory and governance gaps in what is now known as the biggest crypto fraud in history.  An important participant in this fiasco was the auditing company Prager Metis CPAs who agreed to pay a $1.95 million fine to resolve allegations of audit failures in FTX and breach of auditor independence regulations that the Securities and Exchange Commission (SEC) had issue with.

Audit Failures and Negligence

From February 2021 to April 2022, Prager Metis was responsible for auditing FTX according to the Generally Accepted Auditing Standards (GAAS) but the SEC took enforcement action and a court judge raised the following issues:

  • Prager Metis did not adequately assess the risk between FTX and Alameda Research which was controlled by FTX's CEO Sam Bankman Fried and led to the misappropriation of billions in customer funds.
  • Prager Metis put together an audit team without the skills or experience required to audit a fast changing crypto company like FTX.  As a result, the Prager Metis failed to recognize significant warning signs, such as FTX's substantial holdings in illiquid tokens and its close relationship and financial links to Alameda.

See:  Which Companies Were Affected by FTX’s Collapse?

  • Prager Metis's audit reports misled investors into believing that FTX's financial statements were accurate and followed Generally Accepted Accounting Principles creating a false sense of security.
  • The judge emphasized that Prager Metis's inclusion of indemnity clauses in their engagement letters was a violation of auditor independence regulations. This hurt their ability to stay unbiased when reviewing over 200 companies from 2017 to 2020, including FTX. As a result, the reliability of their audits was questioned.

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement:

"Prager Metis fell short in all of these areas.  Because Prager’s audits of FTX were conducted without due care, for example, FTX investors lacked crucial protections."

SEC Settlement

  • A $745 000 civil fine for fraud based on carelessness. This fine was imposed in response to the company's violations of auditing practices when working with FTX.
  • $1.205 million penalty for violating auditor independence requirements involving incorrect indemnity arrangements in over 200 audit engagements between 2017 and 2020.
  • Remedial action to hire an independent compliance expert who will review and improve its audit and quality control processes.  Additionally, restrictions on Prager Metis's ability to take on new audit customers was restricted.

See:  The Complexities of Auditing Digital Assets

Jorge G. Tenreiro, Acting Chief of the SEC's Crypto Assets and Cyber Unit:

“Cutting corners on obligations to comply with the law… does not pay for the entities who take them or for the multitude of victims that this misconduct leaves in its wake”​.

Conclusion

The penalties against Prager Metis raise important questions about whether auditors are prepared to handle quickly evolving and risky industries like cryptocurrency. Auditors must stay independent, skilled, and skeptical to protect investors. In the case of FTX, failing to meet these standards led to major financial losses and damaged public trust in both the auditing profession and the markets.

NCFA Jan 2018 resize - Prager Metis Pays $1.95 Million for FTX Auditing FailuresThe National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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