The U.S. Securities and Exchange Commission has settled with audit firm Prager Metis, which agreed to pay $1.95 million to resolve two charges alleging misconduct when auditing the now-defunct cryptocurrency trading exchange FTX.

The securities watchdog accused Prager of filing two suspicious audit reports that “falsely misrepresented” FTX’s financial position and failed to meet generally accepted auditing standards between February 2021 and April 2022.

FTX, once one of the world’s largest crypto exchanges, was shuttered after an intense period of customer withdrawals caused by a lack of confidence in exchange when it was reported most of its assets were illiquid altcoins. Founder Sam Bankman-Friend was found guilty of seven fraud-related charges and sentenced to 25 years in prison, though he intends to appeal the decision.

"The SEC alleges that Prager failed to follow GAAS and its own policies and procedures by, among other deficiencies, not adequately assessing whether it had the competency and resources to undertake the audit of FTX," Prager wrote in a statement. 

In particular, the SEC accused Prager of failing to disclose the “increased risk stemming from the relationship between FTX and Alameda Research,” the trading firm founded by Bankman-Fried at the center of the exchange’s demise. 

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

Prager Metis, which previously opened an office in the metaverse, agreed to pay a $1 million penalty alongside a $205,000 disgorgement, subject to court approval.

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