The US Securities and Exchange Commission (SEC) has initiated legal proceedings against an accounting firm that provided services to the cryptocurrency exchange FTX before it declared bankruptcy.
According to a statement dated September 29, the SEC alleged that the accounting firm Prager Metis provided audit services to its clients without maintaining the required independence as it continued to provide accounting services. This practice is prohibited under the auditor independence framework.
Excerpt from the SEC’s September 29 statement. Source: SEC
To prevent conflicts of interest, accounting and auditing tasks must be clearly separated. However, the SEC alleges that these intertwined activities spanned a period of approximately three years:
“As alleged in our complaint, Prager’s audits, reviews and audits fell short of these core principles over a period of nearly three years. Our complaint is an important reminder that auditor independence is critical to investor protection.”
While the statement does not specifically mention FTX or other clients, it does emphasize that there were allegedly “hundreds” of auditor independence violations throughout the three-year period.
Additionally, a previous court filing noted that FTX Group hired Metis to audit FTX US and FTX sometime in 2021. Subsequently, FTX filed for bankruptcy in November 2022.
The filing claimed that Metis should have realized that FTX would use its work to increase public trust since former FTX CEO Sam Bankman-Fried publicly disclosed previous FTX audit results.
Related: FTX founder’s request for temporary release should be denied, prosecutors say
Concerns were previously reported regarding the material contained in FTX audit reports.
On January 25, FTX’s current CEO, John J. Ray III, stated in bankruptcy court that he had “significant concerns about the information contained in these audited financial reports.”
Additionally, Senators Elizabeth Warren and Ron Wyden expressed concerns about Prager Metis’ impartiality. They argued that it was acting as an advocate for the crypto industry.
Meanwhile, a law firm that provided services to FTX has recently come under fire.
In a September 21 filing, plaintiffs claim that U.S.-based law firm Fenwick & West should be held partially liable for FTX’s collapse because it reportedly went above and beyond the norm in its service offerings to the exchange.
However, Fenwick & West maintains that it cannot be held responsible for a client’s misconduct as long as its actions remain within the scope of the client’s representation.
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