Civil Law

The Securities and Exchange Commission (SEC) has recently disclosed two settled enforcement actions against Prager Metis CPAs, an audit firm linked to FTX, the now-defunct crypto trading platform. The firm’s founder and former CEO, Sam Bankman-Fried, is currently in custody alongside Sean “Diddy” Combs at the Metropolitan Detention Center in Brooklyn. These enforcement actions highlight three important considerations for auditors and accountants: the SEC’s stance on auditor independence, the qualifications of individuals conducting audits in emerging sectors and the significance of written documentation in the context of regulatory scrutiny.

In a recent article authored by Gray Reed Partners Joshua Smeltzer and Chris Davis, featured in Bloomberg Law, the implications of recent enforcement actions for auditors and accountants are examined. Joshua Smeltzer, a former Justice Department trial attorney, and Chris Davis, the Government Investigations & Compliance Practice Group Leader at Gray Reed, shared their insights on key considerations for auditors navigating these challenges. Together, Joshua and Chris also co-chair the firm’s Blockchain and Digital Assets Practice.

Excerpt:

Be aware of the SEC’s aggressive view of auditor independence. In our experience, audit firms are keenly attuned to independence—maybe more than any other issue. But the allegation here—that independence was impaired by an indemnity provision in the engagement agreements—is one that could easily be missed.

The SEC’s claim that independence was impaired hinges on its “view” that indemnity agreements impair independence. The Commission articulated this view 20 years ago, through an FAQ and an interpretation. But in 2006, a standing advisory group of the American Institute of Certified Public Accountants said that independence isn’t necessarily impaired if the engagement letter includes certain types of indemnity provisions.

Read the full article here.

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