The Securities and Exchange Commission (SEC) recently announced two settled enforcement actions against Prager Metis CPAs, an audit firm connected to the now-infamous cryptocurrency trading platform, FTX. The case underscores vital considerations for auditors and accountants, particularly the SEC’s stringent view on auditor independence, the necessity of experienced professionals in emerging industries, and the inherently risky nature of written communications.
SEC’s View on Auditor Independence
The SEC’s allegation centered on an indemnity provision in Prager Metis’ engagement agreements, which the Commission argued impaired auditor independence. Although this perspective aligns with a view the SEC articulated two decades ago, it contrasts with the guidance of the American Institute of Certified Public Accountants (AICPA). The AICPA allows certain indemnity provisions without deeming them threats to independence. This discrepancy highlights the need for audit firms to meticulously review engagement letters for SEC-regulated entities, ensuring compliance with the SEC’s more restrictive guidelines. For more details, the SEC’s interpretation can be found here.
Staffing Audits in Emerging Industries
Another salient point from the SEC actions against Prager Metis involves the staffing of audits in nascent fields such as digital assets and blockchain technology. The SEC alleged that the proper qualifications were lacking among Prager Metis personnel, despite some external contractors having experience in cryptocurrency trading platforms. Guidance on the training and proficiency required for audit teams can be found in the PCAOB’s AS 1010.
The enforcement actions suggest that firms must balance formal education, professional experience, and training to achieve audit team proficiency. This can be challenging in an emerging industry where experienced professionals are scarce. Firms should also ensure that any new hires or contractors are well-documented and able to withstand rigorous scrutiny.
The Importance of Written Communications
The SEC’s complaints also stress the crucial role that written communications play during regulatory investigations. The agency cited an instance where a Prager Metis engagement partner allegedly acknowledged that staffing would be handled “somewhat on the fly,” which could be a damning piece of evidence when viewed without additional context. This serves as a caution that auditors should be mindful of what they document, always considering how it might be interpreted if reviewed by regulators. Before writing anything, it’s prudent to ask, “Would I want to explain this to a regulator?” This advice applies universally across all levels of an organization.
The SEC’s enforcement actions against Prager Metis CPAs serve as a potent reminder of the nuances and risks involved in auditing rapidly evolving sectors like cryptocurrency. Maintaining auditor independence, ensuring proficient staffing, and exercising caution in written communications are paramount. More information about the case can be found in the full article here.