The United States Securities and Exchange Commission (SEC) has commenced legal action proceedings against an accounting firm that had provided auditing services to cryptocurrency exchange FTX before its bankruptcy declaration.
It is alleged that Prager Metis provided auditing 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 so that auditors can maintain a level of professional scepticism).
“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.” [1]
On the 25th of January, current FTX CEO John J. Ray III told a bankruptcy court that he had “substantial concerns as to the information presented in these audited financial statements.”[2]
Furthermore, US Senators Elizabeth Warren and Roy Wynden raised concerns about Prager Meti’s impartiality, arguing that it served to function as a quasi-advocate for the crypto exchange by providing legitimacy and bolstering trust through its services. The downfall of FTX undoubtedly had a reversal effect on Prager Metis, which is now suffering a severe loss of reputation.
However, Law firm Fenwick and West asserts that: “It (Prager) cannot be held accountable for a client misconduct as long as it remains within the bounds of a client’s representation.” [3]
The legal proceedings against Prager Metis are just one part of the story of the FTX collapse. As the proceedings continue, the industry will be previewed as to how the treatment of FTX by the SEC and other regulatory bodies will begin to shape US crypto and digital asset regulation.
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[1] https://cointelegraph.com/news/sec-lawsuit-prager-metis-audit-ftx
[2] https://cointelegraph.com/news/sec-lawsuit-prager-metis-audit-ftx
[3] https://cointelegraph.com/news/sec-lawsuit-prager-metis-audit-ftx
