Frauds don’t happen by accident and require intent. When fraud occurs, investors depend on auditors to detect it and protect their investment. However, if the auditors fail to meet basic standards, it leads to catastrophic outcomes like FTX's bankruptcy and Prager Metis' audit failures.
The FTX fraud was primarily due to the actions of its founder, but the scale of the fraud was enabled by the negligence of its auditor, Prager Metis. Recently settled misconduct charges against Prager Metis highlight the essential role of competent auditors in averting such situations.
Auditing standards are clear: auditors must understand the client's entity and environment, demonstrate independence and skill, and be adequately staffed to carry out audits, regardless of the client size. Prager Metis, however, attempted to quickly penetrate the metaverse space, without the necessary competency.
With its ambition to be a 'firm of the future,' Prager Metis rushed into the cryptocurrency sector without understanding the risks involved. The SEC's charges and settlement are a wake-up call for the industry to enforce auditing standards more stringently.
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