SEC initiates legal action against FTX’s auditor

The United States Securities and Exchange Commission (SEC) has commenced legal proceedings against an accounting firm that had provided services tocryptocurrency exchange FTX prior to its bankruptcy declaration.

According to a September 29 statement, the SEC alleged that Prager Metis provided auditing services to its clients without maintaining the necessary independence, as it allegedly continued to offer accounting services. This practice is prohibited under the auditor independence framework.

To prevent conflicts of interest, accounting and audit tasks must be kept clearly separate. However, the SEC claims that these activities spanned over a period of approximately three years:

“As alleged in our complaint, over a period of nearly three years, Prager’s audits, reviews, and exams fell short of these fundamental principles. Our complaint is an important reminder that auditor independence is crucial to investor protection.”

While the statement doesn’t explicitly mention FTX or any other clients, it does emphasize that there were allegedly “hundreds” of auditor independence violations throughout the three-year period.

Furthermore, a previous court filing pointed out that the FTX Group engaged Metis to audit FTX US and FTX at some point in 2021. Subsequently, FTX declared bankruptcy in November 2022. 

The filing claimed that given Bankman-Fried’s public announcement of previous FTX audit results, Metis should have been aware that its work would be utilized by FTX to enhance public trust.

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Concerns were previously reported regarding the material presented in FTX’s financial statements.

On Jan. 25, current FTX CEO John Ray told a bankruptcy court that he had “substantial concerns as to the information presented in these audited financial statements.”

Furthermore, Senators Elizabeth Warren and Ron Wyden raised concerns about the firm’s impartiality, arguing that it functioned as an advocate for the crypto industry.

Meanwhile, a law firm that provided services to FTX has come under scrutiny in recent times.

In a Sept. 21 court filing, plaintiffs allege that Fenwick & West can be held liable because it reportedly exceeded the norm when it came to its service offerings to FTX.

However, Fenwick & West asserts that it cannot be held accountable for a client’s misconduct as long as its actions remain within the bounds of the client’s representation.

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