On the 18th, the U.S. Securities and Exchange Commission (SEC) announced that Prager Metis CPAs, LLC, a California-based audit firm that filed a lawsuit against the bankrupt FTX for misconduct in its audit and violation of its audit independence as an audit firm, has agreed to settle.
Prager agreed to pay $1.95 million (approximately 27.8 billion yen) as a settlement.
In the lawsuit, the SEC alleged that Prager falsely reported FTX's compliance with auditing standards. According to the complaint, Prager issued two audit reports for FTX between February 2021 and April 2022 and falsely reported that the audit complied with General Auditing Standards (GAAS).
The SEC cited Prager's failure to follow General Auditing Standards and Procedures and its failure to properly assess whether it had the capacity and resources to conduct an audit of FTX.
This control deficiency resulted in Prager failing to comply with GAAS on multiple aspects of its audit, and most significantly, failing to understand the risks arising from its relationship with FTX and Alameda Research, a crypto hedge fund managed by FTX's former CEO.
According to the SEC's complaint, Prager is also charged with negligent fraud. Prager did not admit or deny the SEC's findings, and agreed to a permanent injunction, pay a civil penalty of $745,000, hire an independent consultant to review and evaluate its audit, review and quality control policies and procedures, and comply with certain restrictions on accepting new audit clients. The settlement is contingent on receiving court approval.
"Effective investor protection requires a collaborative approach that includes both regulators and gatekeepers such as audit firms. To fulfill their role, audit firms must remain independent, exercise due professional care and skepticism, and adhere to all applicable professional standards. Prager fell short in this regard. Prager's inadequate audit of FTX left FTX investors lacking important protections when making their investment decisions. They were ultimately defrauded out of billions of dollars by FTX and paid the price when FTX collapsed," SEC Enforcement Division Director Gurbir S. Grewal said in a statement.
Agreement to judgment for audit firm independence violations
The SEC also announced the entry of a final judgment to resolve a separate charge previously filed against Prager, alleging that Prager violated audit firm independence rules and aided and abetted clients in violating federal securities laws.
The SEC alleged that Prager improperly included indemnification clauses in more than 200 audit, review and inspection engagements between December 2017 and October 2020, resulting in the firm failing to maintain independence from clients as required by federal securities laws.
The final judgment also imposes a permanent injunction, a civil penalty of $1 million, and $205,000 in unjust enrichment, including prejudgment interest.
Reference: SEC
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