SEC hits Prager Metis with hundreds of audit violations

The Securities and Exchange Commission charged Prager Metis CPAs LLP, a Top 100 Firm based in New York and its California affiliate, with violating auditor independence rules on more than 200 audits, reviews and exams.

The SEC complaint accused the firm Friday of improperly including indemnification provisions in engagement letters for hundreds of audits, reviews and examinations. The SEC said Prager failed to comply with the its auditor independence rule in connection with 62 audits, 144 reviews and 11 exams, in connection with 87 engagement letters dated from around Dec. 11, 2017 until about Oct. 28, 2020. The audits involved 54 public issuers, four registered broker-dealers and four registered investment advisors, from which Prager collectively earned over $3 million in fees.

The complaint alleged that Prager was not independent from its clients for those engagements, as required under the federal securities laws. According to the SEC, Prager continued to sign engagement letters containing indemnification provisions and also issued "accountant's reports" in which it claimed to be independent in connection with its audits and exams, even after Prager's senior partners were repeatedly told that inclusion of indemnification provisions in engagement letters rendered Prager not independent. Many of the firm's clients included those "accountant's reports" in their filings with the SEC. Prager allegedly also didn't advise its clients about the violations, even after the Public Company Accounting Oversight Board told Prager that the indemnification provisions violated the independence requirements of the federal securities laws. 

Prager Metis disputed the SEC's charges. "We strongly disagree with the SEC's allegations because we always acted in a way that was independent of our clients," the firm said in a statement emailed to Accounting Today. "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. Prager takes its independence obligations seriously and intends to vigorously defend itself in this litigation."

Prager has previously landed in hot water for its audits of FTX, the collapsed crypto exchange (see story).

The SEC filed its complaint in a federal district court in Florida charging Prager with violating the auditor independence provisions of the federal securities laws and aiding and abetting its clients' violations of the federal securities laws. In the complaint, the SEC sought a permanent injunction, disgorgement plus prejudgment interest, and a civil monetary penalty against 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, in a statement Friday. "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."