SEC says FTX auditor did not understand the crypto market

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The US Securities and Exchange Commission has charged the auditor of collapsed cryptocurrency exchange FTX with misconduct, saying the firm took on Sam Bankman-Fried’s company as a client without properly understanding the crypto market.

Prager Metis, an accounting firm that ranks outside the top 50 US firms by revenue, gave a clean bill of health to FTX’s financial results for the two years before it collapsed in November 2022 with an $8bn hole in its balance sheet.

“In its rush to accept FTX as an audit client, Prager Metis assembled an engagement team that collectively lacked the competence, experience, and knowledge to appropriately conduct the audits,” the SEC’s complaint alleged, including a lead partner who “fundamentally did not understand FTX, or the crypto asset markets in which it operated”.

From this initial failure flowed a series of other auditing failures in the design and execution of the audits, the SEC said.

Specifically, Prager Metis failed to properly understand the relationship between Bahamas-based FTX and Bankman-Fried’s crypto hedge fund Alameda Research, which was later revealed to have had the ability to borrow unlimited customer funds from FTX. Bankman-Fried was sentenced in March to 25 years in prison for fraud.

Prager Metis will pay a civil penalty of $745,000 to settle the charges related to FTX, without admitting or denying the SEC’s findings.

Bruce Braun, an attorney for Prager Metis at the law firm Sidley Austin, said that “like others, it was a victim of the collusive fraud by management at FTX. Prager Metis remains dedicated to audit quality and committed to continuous improvement.”

According to the SEC’s complaint, FTX needed audited financial statements quickly and Prager Metis signed off on an initial set of accounts in July 2021 — five months after taking it on as a client — without properly exploring the borrowing by Alameda.

“Bankman-Fried and the FTX team had been unsuccessful in their prior attempts to identify a firm that was willing to audit FTX’s financial statements, and they were eager to obtain audited financial statements to support their plan of engaging in a public offering,” the SEC wrote.

Prager Metis took “at face value the statement that Alameda — the company Bankman-Fried owned and that served as the primary market maker for FTX — operated under terms that were no different than those that would apply to an individual customer purchasing a small amount of bitcoin on margin for the first time.”

The firm also agreed on Tuesday to pay $1.2mn to settle separate SEC charges alleging violations of auditor independence rules in dozens of other audits.