The United States Securities and Exchange Commission (SEC) has brought forth allegations against the accounting firm responsible for auditing the now-defunct cryptocurrency exchange, FTX. The firm, known as Prager Metis, stands accused of aiding clients in the violation of U.S. federal securities regulations, as well as breaching auditor independence requirements.
Prager Metis Faces Charges for Violating Auditor Independence Standards
The SEC has initiated legal proceedings against Prager Metis CPAs, LLC and its associated California professional services entity, Prager Metis CPAs, LLP. The charges pertain to both violations of auditor independence standards and complicity in clients’ infringements of securities laws within the United States.
The SEC has filed its lawsuit in the United States District Court for the Southern District of Florida. According to the complaint, from December 2017 through October 2020, Prager Metis included indemnification clauses in engagement letters related to over 200 audits, reviews, and examinations. The SEC contends:
Prager Metis did not maintain the requisite independence from its clients during these engagements, as mandated by U.S. federal securities regulations.
Despite receiving repeated notifications from regulators, Prager Metis continued to execute engagement letters containing indemnification clauses, and issued “accountant’s reports” wherein the firm claimed to be independent. The SEC further clarified:
Several of Prager Metis’s clients incorporated these “accountant’s reports” into their official filings with the SEC. Moreover, Prager Metis is alleged to have neglected advising its clients of its own violations, even after the Public Company Accounting Oversight Board (PCAOB) informed the firm that such indemnification clauses were in breach of federal securities laws governing auditor independence.
In a recent press release, the SEC revealed that it is seeking a permanent injunction, disgorgement plus pre-judgment interest, and a civil monetary fine against the accounting firm. The Director of the SEC’s Miami Regional Office commented on the matter, emphasizing:
The sanctity of auditor independence is fundamental for preserving the integrity of financial disclosures and maintaining public confidence. This complaint serves as a pivotal reminder that auditor independence is integral to safeguarding the interests of investors.
Though FTX or other clientele of Prager Metis were not explicitly named in the SEC’s announcement, FTX had previously stated, prior to its bankruptcy in November 2022, that its financial records for 2021 were audited by both Prager Metis and Armanino, another firm claiming expertise in cryptocurrency. Earlier this year, FTX’s new management raised questions about the reliability of the audited financial statements.
Share your views on the SEC’s legal action against Prager Metis in the comments section below.
Frequently Asked Questions (FAQs) about SEC Charges Against Prager Metis
What is the main issue that the U.S. Securities and Exchange Commission (SEC) has with Prager Metis?
The SEC has charged accounting firm Prager Metis with multiple violations, including failing to maintain auditor independence and aiding clients in violating U.S. federal securities laws. The charges are particularly related to the firm’s work for the defunct cryptocurrency exchange, FTX.
Who are the entities being charged by the SEC?
The SEC has initiated legal proceedings against Prager Metis CPAs, LLC and its associated California professional services entity, Prager Metis CPAs, LLP.
What are indemnification provisions and why are they significant in this case?
Indemnification provisions are clauses in engagement letters that offer some form of protection against legal action or liability. In this case, Prager Metis included such clauses in over 200 audits, reviews, and examinations. The SEC alleges that these provisions violate auditor independence rules mandated by federal securities laws.
What are the charges filed in the United States District Court for the Southern District of Florida?
The SEC has filed its complaint in this court, alleging that Prager Metis violated auditor independence rules and aided clients in breaking federal securities laws from December 2017 through October 2020.
What penalties is the SEC seeking against Prager Metis?
The SEC is seeking a permanent injunction against Prager Metis, along with disgorgement plus pre-judgment interest, and a civil monetary fine.
What was the role of the Public Company Accounting Oversight Board (PCAOB) in this matter?
The PCAOB had informed Prager Metis that its practice of including indemnification clauses in engagement letters was in violation of federal securities laws concerning auditor independence. Despite this, Prager Metis continued the practice.
Did Prager Metis issue any false or misleading statements?
According to the SEC, Prager Metis issued “accountant’s reports” claiming to be independent, despite regulators repeatedly notifying the firm’s senior partners that their practice rendered them not independent.
How does this case relate to the cryptocurrency exchange FTX?
Though the SEC’s announcement does not explicitly name FTX, the now-defunct cryptocurrency exchange had previously announced that its 2021 financial records were audited by Prager Metis. The new management of FTX had also expressed concerns about the audited financial statements earlier this year.
What does the Director of the SEC’s Miami Regional Office have to say about this case?
The Director emphasized the critical importance of auditor independence in protecting the integrity of financial reporting and in maintaining public trust. The case serves as a reminder that auditor independence is integral to investor protection.
More about SEC Charges Against Prager Metis
- U.S. Securities and Exchange Commission (SEC)
- Public Company Accounting Oversight Board (PCAOB)
- Federal Securities Laws
- Auditor Independence Requirements
- Legal Proceedings in the U.S. District Courts
- Overview of Cryptocurrency Regulations
- FTX Cryptocurrency Exchange
- Armanino LLP
- Investor Protection Measures