SEC Takes Action Against Accounting Firm Linked to FTX: A Cautionary Tale

The SEC’s Legal Action

In a legal showdown that has the finance world buzzing, the United States Securities and Exchange Commission (SEC) has unleashed its legal crew on Prager Metis, an accounting firm that found itself entangled with the notorious cryptocurrency exchange FTX. This comes on the heels of FTX’s high-profile bankruptcy, making for a perfect storm of scrutiny.

Auditor Independence: The Crux of the Matter

The SEC’s complaint stems from allegations that Prager Metis provided auditing services while juggles other accounting tasks, effectively tossing auditor independence out the window. According to the SEC’s statement from September 29, such behaviors violate the sacred principles of the auditor independence framework, leading to potential conflicts of interest—something investors loathe more than Monday mornings.

A Three-Year Tangle

Over a span of nearly three years, the SEC claims that Prager Metis let their auditing standards slide, seemingly missing the big picture about maintaining independence. The uproar? Hundreds of violations—yes, you read that right. All this time, they engaged in audits, reviews, and exams that the SEC argues were anything but independent, which, let’s be honest, sounds like a recipe for disaster.

FTX’s Financial Woes

While the SEC’s statement cleverly avoids naming FTX directly, previous records show that Prager Metis audited both FTX US and FTX itself back in 2021, a cozy relationship that would make a conspiracy theorist raise an eyebrow. When FTX declared bankruptcy in November 2022, many started retracing their steps looking for answers. Looking back, current FTX CEO, John J. Ray III, voiced his serious doubts about the audited financials, expressing that they raised more questions than they answered.

Political Watchdogs Weigh In

The fallout didn’t just stop at legal proceedings. Senators like Elizabeth Warren and Ron Wyden jumped in, sounding alarm bells about Prager Metis, suggesting they were more like cheerleaders for the crypto industry than impartial auditors. If you’re an auditor who had senators questioning your integrity, that’s about as welcome as a porcupine at a balloon party.

Liability on the Table

And what about the legal firms dabbling in the crypto circus? Following the ripples of FTX’s collapse, another law firm, Fenwick & West, faces allegations of being partially responsible for FTX’s downfall. Plaintiffs insist that the firm went above and beyond its typical role to the detriment of investors. However, the firm retorts, claiming it can’t be blamed for its client’s bad behavior unless it was holding the proverbial steering wheel when things went south.