SEC accuses Prager Metis of misconduct in FTX audit

The U.S. Securities and Exchange Commission (SEC) has charged the auditing firm Prager Metis for violations related to the failed cryptocurrency exchange FTX. The SEC accuses the firm of accepting Sam Bankman-Fried’s venture as a client without possessing adequate knowledge of the cryptocurrency market. Prager Metis, an auditing firm that does not rank in the top 50 U.S. firms by revenue, certified FTX’s financial condition as proper for two years. Shortly thereafter, in November 2022, the exchange collapsed with a deficit of $8 billion. According to the SEC complaint, Prager Metis hurriedly assembled a team that lacked the competence, experience, and knowledge necessary for conducting the audits. The lead partner did not understand either FTX or the market for crypto assets. This initial failure, according to the SEC, led to further errors in the design and execution of the audits. Specifically, Prager Metis failed to correctly understand the relationship between the Bahamas-based FTX and Bankman-Fried's crypto hedge fund, Alameda Research. Alameda was later found to have the ability to borrow unlimited customer funds from FTX. Bankman-Fried was sentenced to 25 years in prison for fraud in March. To settle the charges, Prager Metis will pay a civil penalty of $745,000 without admitting or denying the SEC's findings. According to Hazen, FTX urgently needed audited financial statements, and Prager Metis approved an initial set of accounts in July 2021, five months after accepting the assignment, without properly reviewing the credit extension to Alameda. Bankman-Fried and the FTX team had previously failed to find a firm willing to audit FTX’s financial statements. They sought audited financial reports to prepare for an initial public offering. Prager Metis accepted the assertion that Alameda—Bankman-Fried’s firm and the main market maker for FTX—operated under the same conditions as a customer making a margin purchase of a small amount of Bitcoin for the first time. The company did not immediately respond to a request for comment. It also agreed to pay an additional $1.2 million on Tuesday to settle separate SEC charges regarding violations of auditor independence rules in dozens of other cases.