FTX Auditor Prager Metis to Pay $1.95 Million for Negligence

Prager Metis, the accounting firm that audited FTX, has agreed to pay $745,000 in civil penalties to settle misconduct allegations brought by the Securities and Exchange Commission (SEC) in connection with its audits of the now-collapsed crypto exchange.

Repeated Violations by the Auditor

The auditor further agreed to pay another $1.2 million for a second regulatory investigation into auditor independence rule violations during the audit of over 200 companies between 2017 and 2020. The amount includes $1 million in civil penalties and $205,000 in recovery and interest.

For its role with FTX, the US regulator highlighted negligence-based fraud in two audit reports for the crypto exchange: one produced in 2021 and the other in 2022. According to the SEC’s complaint, the audit firm falsely reported that the audits were conducted in accordance with Generally Accepted Auditing Standards (GAAS); however, it failed to comply with the framework in multiple aspects of the audit, along with its own policies and procedures.

The regulator additionally highlighted that the auditor failed to establish the connection between FTX and its sister crypto hedge fund, Alameda Research.

“To fulfil their role, auditors must, among other things, be independent, exercise due professional care and scepticism, and comply with all applicable professional standards,” said Gurbir Grewal, Director of the SEC's Division of Enforcement. “As we allege in these enforcement actions, Prager Metis fell short in all of these areas.”

$32B to $0 Overnight

FTX entered bankruptcy in November 2022, when it was valued at $32 billion. The crypto exchange’s collapse resulted from the shady business practices of its founder and former CEO, Sam Bankman-Fried, who did not even separate the funds of the customers and the business.

Bankman-Fried was convicted of seven criminal counts of fraud and conspiracy and was sentenced to 25 years in prison. His legal representatives recently appealed his conviction and sought a new trial.

“Because Prager’s audits of FTX were conducted without due care, FTX investors, for example, lacked crucial protections when making their investment decisions,” Grewal added. “Ultimately, they were defrauded out of billions of dollars by FTX and bore the consequences when FTX collapsed.”