SEC initiates legal action against FTX’s auditor

The United States Securities and Exchange Commission (SEC) launched legal proceedings against an accounting firm that had provided services to cryptocurrency exchange FTX before its bankruptcy filing.

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

To avoid conflicts of interest, accounting and auditing tasks should be kept clearly separate. However, the SEC claims that these intertwined activities spanned a period of approximately three years:

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

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

Furthermore, a previous court presentation noted that FTX Group hired Metis to audit FTX US and FTX sometime in 2021. FTX subsequently filed for bankruptcy in November 2022.

The filing alleged that since former FTX CEO Sam Bankman-Fried publicly announced the results of previous FTX audits, Metis should have recognized that FTX would use its work to bolster public trust.

Related: FTX founder's request for temporary release should be denied, prosecutors say

Concerns were previously reported about material presented in FTX audit reports.

On Jan. 25, FTX's current CEO, John J. Ray III, told a bankruptcy court that he had "substantial concerns regarding the information presented in these audited financial statements."

Additionally, Senators Elizabeth Warren and Ron Wyden raised concerns about The impartiality of Prager Metis. They argued that he 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 September 21 court filing, the plaintiffs allege that Fenwick & West should be held partially responsible for the collapse of FTX because it allegedly exceeded the norm when it came to its service offerings to the exchange.

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

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