FTX Auditor’s $2 Million Fine Reveals Wider Compliance Issues

Auditors being fined millions of dollars often makes headlines, but the reality is more nuanced—and possibly more concerning.

Prager Metis, one of the audit firms involved with collapsed crypto trading firm FTX, reached a $1.95 million settlement this week to settle charges from the Securities and Exchange Commission over botched audits and separate conflict of interest violations.

Audit firms have a complicated history with financial fraud and unethical actors, with the realities of the audit process diverging from public perception. Audits aren’t, and never have been, a 100% review of every entry and piece of financial data—although that may change with the billions of dollars in investments being invested in artificial intelligence.

Criticizing the performance of any single firm with the benefit of hindsight isn’t productive to market confidence nor the important audit industry. Rather, investors and analysts should consider a few emerging market realities that may shape the trajectory of audit confidence in the near-to-medium term.

The SEC is sending a message. Any seasoned crypto investor knows that the SEC has pursued an aggressive stance when it comes to the crypto industry. Chair Gary Gensler’s campaign to rein in the “Wild West” of crypto, and requesting additional funding (over $150 million) specifically to increase crypto regulatory efforts, has made no secret of efforts to bring the sector under the singular oversight of the SEC.

From suing numerous exchanges and token issuers or seeking multibillion-dollar settlements from Ripple, or issuing pronouncements (SAB 121) chilling market appetite to service the space, the message is clear. Crypto is a high-risk industry in the eyes of the SEC, and audit firms should be prepared accordingly.

The SEC has engaged in 173 enforcement actions against the crypto industry from 2013 to 2023 and collected $2.89 billion in fines during that same period. These includes actions against Coinbase (an SEC registrant) and Kraken, although FTX operated with near impunity until its collapse.

Audit quality is a bigger issue. When the Public Company Accounting Oversight Board released its latest audit quality report this month, the news was grim. At the Big Four, the accounting and auditing firms with the biggest budgets and headcounts, the US units had an audit deficiency rate of 24%, up from 13% in the previous report. Following the release of this negative report, the PCAOB adopted a wider range of measures that audit firms will need to report on, specifically focusing on improving audit quality.

This is all to say that auditing has deteriorated, and by the headlines being made at the SEC, multimillion-dollar fines and critiques of the audit field aren’t going away.

Marcum agreed to pay $13 million last year to settle SEC and PCAOB charges that its audits of special purpose acquisition companies had widespread failures. The SEC fined audit firm BF Borgers $12 million in May following fraud allegations impacting public company audits.

Whether this uptick in audit deficiencies has to do with a lack of employees (the accounting pipeline is a well-known problem) or pressure being brought to bear as private equity continues to make inroads is up for debate. In any case, the reputation of the audit profession, audit quality, and market expectations continue to be on a less-than-desirable course.

Upskilling is imperative. With fewer accounting professionals coming into the profession, and non-CPA firms making forays into the analytics and forecasting aspect of accounting, there was already increasing pressure on those individuals working in the audit field.

When combined with the continued rise of tokenized assets (spot exchange-traded funds and state-issued stablecoins, to mention just two), the massive interest and investment in AI across the economy, and the staying power that environmental, social, and governance has had (despite recent pushback from ESG opponents), upskilling increasingly looks like a permanent aspect of the accounting and auditing space.

Audits most likely will never be perfect, and the SEC seems to be singling out the crypto space for outsized fines and punishments, but that’s no excuse. Auditors, and the market, deserve continuously improving audit services. It’s up to the profession to deliver.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Sean Stein Smith is an associate professor at Lehman College (CUNY), serves on the advisory board of the Wall Street Blockchain Alliance, and chairs its accounting working group.

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