On 17 September 2024, the US Securities and Exchange Commission (US SEC) announced a settlement with Prager Metis CPAs, LLC and its California affiliate Prager Metis CPAs LLP for violating federal auditor independence regulations in their audits of the now-defunct crypto asset platform, FTX. The settlement resolves allegations that Prager failed to comply with Generally Accepted Auditing Standards (GAAS) and engaged in negligence-based fraud in its auditing practices. Without admitting or denying the findings, Prager has agreed to pay US$1.95 million in penalties and undertake remedial measures to address these violations.
The facts of the case, as presented, outline that between February 2021 and April 2022, Prager issued two audit reports for FTX, asserting that its audits complied with GAAS. However, the US SEC alleges that Prager failed to meet auditing standards, particularly in assessing whether the firm had the necessary competency and resources to undertake the FTX audits. The US SEC’s complaint further points out that Prager’s audits failed to account for the elevated risks posed by the close relationship between FTX and Alameda Research LLC, a hedge fund controlled by FTX’s CEO. The firm’s internal control procedures and policies were also found to be deficient, leading to material compliance failures throughout the audit process.
The charges against Prager Metis are linked to two areas. First, the firm failed to comply with GAAS while conducting audits of the now-collapsed FTX platform. Second, Prager did not adequately assess whether it had the expertise and resources required to audit FTX, leading to a failure to recognize and properly audit the risks stemming from the relationship between FTX and Alameda Research LLC, a hedge fund owned by FTX’s CEO.
The core issue involved in the SEC’s case are Prager’s failure to maintain the required level of independence from its clients, as mandated by federal securities laws. Between December 2017 and October 2020, Prager included indemnification provisions in engagement letters for more than 200 audits and reviews, violating auditor independence rules. Despite repeated warnings from regulatory bodies like the United States’ Public Company Accounting Oversight Board (US PCAOB), Prager did not correct these violations and continued to issue reports in which it purported to be independent. The US SEC brought separate charges for violations of auditor independence rules, indemnification provisions in engagement letters for over 200 audit, review, and exam engagements which affected a wide array of Prager’s clients and were not corrected even after the US PCAOB flagged the issue.
As part of the settlement, Prager has agreed to pay a civil penalty of US $745,000 and will undertake remedial actions, including the retention of an independent consultant to review and evaluate its audit and quality control policies and procedures. Prager will also be subject to restrictions on accepting new audit clients. In a separate but related action concerning the auditor independence violations from 2017 to 2020, Prager will pay US $1 million in civil penalties and disgorgement, along with US $205,000 in prejudgment interest. Both settlements require Prager to comply with permanent injunctions, barring the firm from future violations of federal securities laws, particularly those related to auditor independence and compliance with Generally Accepted Auditing Standards. Prager Metis will be legally restrained from engaging in any conduct similar to the violations identified in their audits of FTX and other clients.
(Source: https://www.sec.gov/files/litigation/complaints/2024/comp-pr2024-133-motion.pdf, https://sec.gov/newsroom/press-releases/2024-133)
