In a startling development that further unravels the FTX saga, the Securities and Exchange Commission (SEC) has announced a $1.95 million settlement with Prager Metis, the audit firm responsible for reviewing the now-defunct crypto giant’s financials. This settlement, unveiled on September 17, 2024, sheds new light on the systemic failures that allowed FTX’s fraud to go undetected for so long.
Prager Metis, once trusted to provide accurate financial assessments, now stands accused of negligence in its audits of FTX. The SEC’s complaint alleges that between February 2021 and April 2022, Prager issued two audit reports that falsely claimed compliance with Generally Accepted Auditing Standards (GAAS).
The most damning allegation? Prager’s failure to recognize the heightened risk posed by the relationship between FTX and Alameda Research, the crypto hedge fund controlled by FTX’s CEO. This oversight proved catastrophic, as the intertwining of these entities was at the heart of FTX’s eventual collapse.
Beyond FTX: A Pattern of Misconduct
The SEC’s actions against Prager Metis extend beyond the FTX debacle. In a separate case, the firm was charged with violating auditor independence rules across more than 200 audits, reviews, and exams between 2017 and 2020. This pattern of misconduct raises serious questions about the integrity of financial oversight in the crypto industry.
As part of the settlement, Prager Metis will pay substantial penalties and face restrictions on accepting new audit clients. The firm must also retain an independent consultant to review its audit procedures, a move that signals the SEC’s commitment to preventing future lapses.
A Wake-Up Call for Crypto
Gurbir S. Grewal, Director of the SEC’s Enforcement Division, didn’t mince words: “Because Prager’s audits of FTX were conducted without due care, FTX investors lacked crucial protections when making their investment decisions. Ultimately, they were defrauded out of billions of dollars by FTX and bore the consequences when FTX collapsed.”
This settlement serves as a stark reminder of the critical role auditors play as financial gatekeepers. As the crypto industry continues to evolve, the need for rigorous, independent oversight has never been more apparent. The FTX scandal, and now this audit failure, underscore the urgent need for stronger safeguards to protect investors in the volatile world of digital assets.
