Auditor Prager Metis sued by SEC over auditor independence rules

SEC sues accounting firm Prager Metis for alleged auditor independence violations related to a template it used when signing on clients.

The securities watchdog said in its complaint that between December 2017 and October 2020, Prager Metis improperly added indemnification provisions to engagement letters to clients for more than 200 audits and other work, which prevented the firm from being the independent gatekeeper it is supposed to be under law.

The SEC alleges that Prager continued to sign engagement letters containing indemnification provisions and also issued “accountant’s reports” in which it purported to be independent in connection with its audits and exams, even after Prager’s senior partners repeatedly were notified that inclusion of indemnification provisions in engagement letters rendered Prager not independent.

Many of Prager’s clients included those “accountant’s reports” in their filings with the SEC. Prager allegedly also failed to advise its clients of its violations, even after the Public Company Accounting Oversight Board informed Prager that the indemnification provisions violated the independence requirements of the federal securities laws.

“Auditor independence is critical to both protecting the integrity of financial reporting and promoting public trust.”

Eric I. Bustillo, Director, SEC Miami Regional Office

The SEC’s complaint against Prager Metis CPAs and its professional services firm was filed in the US District Court for the Southern District of Florida. The regulator said it is seeking an injunction and penalties, among other things, and its investigation into Prager Metis is ongoing.

Prager Metis was the auditor that audited now-bankrupt crypto exchange FTX and Coindesk says it reported $1 billion in revenues in 2021. The mid-sized firm lists 24 operating locations on its website, including “the metaverse”.

Statements from SEC and Prager

“Auditor independence is critical to both protecting the integrity of financial reporting and promoting public trust,” said Eric I Bustillo, Director of the SEC’s Miami Regional Office. “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.”

Prager Metis said in a statement it gave Reuters that it always acted with independence from clients and intends to “vigorously defend itself” in court.

“These allegations arise solely from template indemnification language used several years ago that was never enforced or sought to be enforced, and the SEC does not allege this language affected the quality of our audits,” the statement said. “Prager takes its independence obligations seriously.”