Former FTX Accountant Sued by SEC for Violating Auditor Independence Rules
The US Securities and Exchange Commission (SEC) has filed a lawsuit against Prager Metis, the former accountant of FTX, accusing the firm of violating auditor independence rules and aiding its clients’ violations of federal securities laws. The SEC alleges that Prager Metis included indemnification provisions in engagement letters for over 200 audits, reviews, and exams between December 2017 and October 2020, which compromised its independence from its clients. The SEC emphasized that auditor independence is crucial for investor protection.
SEC Alleges Continued Violations and Lack of Client Disclosure
The SEC further claims that Prager Metis continued to sign engagement letters with indemnification provisions and issued “accountant’s reports” asserting independence even after being informed by senior partners that these provisions made the firm non-independent. Additionally, Prager Metis allegedly failed to inform its clients about the violations, despite being notified by the Public Company Accounting Oversight Board that such provisions violated independence requirements. Many of the firm’s clients included these reports in their filings with the SEC.
Prager Metis Ties to FTX
Although the current allegations do not directly mention FTX, a previous court filing stated that Prager Metis facilitated FTX Group’s operations by providing clean audit opinions. This helped FTX CEO Sam Bankman-Fried gain trust from customers and investors. In a now-deleted post on its website, Prager Metis expressed pride in supporting FTX US.
SEC Seeks Injunction, Fine, and Disgorgement
The SEC is seeking a permanent injunction against Prager Metis, as well as a fine and forfeiture of income earned through its business practices. In response, Prager Metis stated that it disagrees with the SEC’s claims, attributing them to template indemnification language that was never enforced. The accounting company intends to defend itself in court.
Hot Take: Prager Metis Faces Serious Consequences for Violations
The SEC’s lawsuit against Prager Metis highlights the importance of auditor independence and the consequences of violating this fundamental principle. By including indemnification provisions in engagement letters, Prager Metis compromised its independence and failed to protect investors. The alleged continued violations and lack of client disclosure further demonstrate a disregard for regulatory requirements. If found guilty, Prager Metis could face significant penalties, including fines and the forfeiture of income. This case serves as a reminder to accounting firms to uphold their independence and fulfill their responsibilities to ensure investor protection.
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