The Metaverse’s First Accounting Firm Won’t Be Paying These Big Old SEC Fines in Crypto We Assume

Hey remember the metaverse? Thank goodness generative AI swooped in and made everyone forget about that dumb shit. When I say “everyone” I mean crypto bros and accounting firms trying desperately to be cool with their PS2-era metaverse avatars, the rest of us forgot about it pretty much right off the bat. I only kept it in my peripheral vision pre-AI hype days because I could shit out an article on an accounting firm being lame in it every now and then. Such as:

KPMG’s New Metaverse Space is Like the First-Person Shooters You Played in 1999 But Worse

While the rest of the world was asking “huh? The what,” NYC-headquartered Prager Metis was buying up “real estate” in the metaverse and putting out press releases about it. In December 2022, Prager Metis put down nearly $35,000 in actual money for this three-story “property” in Decentraland, thus planting a flag on the Metisverse (groan, I know).

Let’s take a tour!

:25 killed me. My soul while watching this be like…

Wrote Kotaku’s Zack Zwiezen of Decentraland in 2022:

Decentraland is a 3D online virtual world that is built around the minting, buying, and selling of NFT items and digital land. It’s technically a game, but it seems about as fun as hanging out in a doctor’s office.

Or an accounting firm office.

It’s also hard to miss the general cheap, cluttered vibe of it all. This glimpse of Decentraland makes it look like a fictional game that was tossed together in a few hours for an episode of CSI: Whatever City, in which the investigators are trying to solve a murder that involves some “new” and “popular” online world. I can see a character actor playing this and going “Yeah, this is where I last saw Sally. Or someone who looked like Sally, we all look like the same crappy digital avatar in here.”

See? Prager was ahead of the curve. Go into any real world accounting firm and it’s the same five or six character models with only slightly customized hair options and different colored shirts.

So what if some assholes on the internet had jokes, Prager Metis was blazing virtual trails! They were providing potential clients “with the expertise needed to navigate the metaverse from a financial perspective” in the metaverse! There’s a 3rd floor you can jetpack to!

And then FTX blew up. FTX hired both Armanino and Prager Metis to audit their 2020 and 2021 financial statements (a totally normal thing to do because who doesn’t love getting a train run on you by auditors) which suddenly put a spotlight on the metaverse’s first accounting firm. When it was all over, restructuring pro and Enron biohazard cleanup leader John J. Ray III, who’d been appointed CEO after FTX went bankrupt, had this to say about the state of FTX:

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as I occurred here,” he said, incredulously. Again, this guy mopped up Enron. Remember that.

See also: No One Should Be Surprised to Learn FTX Used QuickBooks

We pretty much forgot that Prager Metis got in trouble for the whole FTX thing until now after seeing this press release the SEC put out the other day.

The Securities and Exchange Commission today announced that Prager Metis CPAs, LLC (Prager) and its California professional services firm, Prager Metis CPAs LLP, (collectively, the Prager Entities) agreed to pay $1.95 million to resolve two actions alleging misconduct in its audits of the now-defunct crypto asset trading platform, FTX, and auditor independence violations.

In one of the actions, the SEC alleges that Prager misrepresented its compliance with auditing standards regarding FTX. According to the SEC’s complaint, from February 2021 to April 2022, Prager issued two audit reports for FTX that falsely misrepresented that the audits complied with Generally Accepted Auditing Standards (GAAS). The SEC alleges that Prager failed to follow GAAS and its own policies and procedures by, among other deficiencies, not adequately assessing whether it had the competency and resources to undertake the audit of FTX. According to the complaint, this quality control failure led to Prager failing to comply with GAAS in multiple aspects of the audit—most significantly by failing to understand the increased risk stemming from the relationship between FTX and Alameda Research LLC, a crypto hedge fund controlled by FTX’s CEO.

The SEC’s complaint charges Prager with negligence-based fraud. Without admitting or denying the SEC’s findings, Prager agreed to permanent injunctions, to pay a $745,000 civil penalty, and to undertake remedial actions, including retaining an independent consultant to review and evaluate its audit, review, and quality control policies and procedures and abiding by certain restrictions on accepting new audit clients. The settlement is subject to court approval.

Will the independent consultant be strapping on a VR headset and holding classes for leadership in Decentraland? I sure hope so. It’ll probably be more interesting than Decentraland raves:

This is the #metaverse… A live rave happening right now in @decentraland for the upcoming @LightbulbmanNFT release by #BjarneMelgaard. Music from @feedelity @prins_thomas @mightbetwins #NFTdrop #rave #virtualevent #NFTCommunity pic.twitter.com/aC4WYRbgH9

— Alex Moss (@alexmoss) January 20, 2022

Don’t you hate when literally everyone at the rave is in a K-hole at the same time?

“Effective investor protection requires a collaborative approach that includes both regulators and gatekeepers such as auditors. To fulfill their role, auditors must, among other things, be independent, exercise due professional care and skepticism, and comply with all applicable professional standards. As we allege in these enforcement actions, Prager Metis fell short in all of these areas,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “Because Prager’s audits of FTX were conducted without due care, for example, FTX investors lacked crucial protections when making their investment decisions. Ultimately, they were defrauded out of billions of dollars by FTX and bore the consequences when FTX collapsed. By limiting Prager’s ability to take on new business and by requiring it to retain an independent compliance consultant, today’s resolutions not only enhance investor protection, they also serve as a warning to audit professionals that are not appropriately meeting their gatekeeping obligations.”

NGL reading that quote from Gurbir S. Grewal was more fun than watching that 37 second rave clip.

“Once more we see an entity, lured by the siren song of the crypto asset markets, cutting corners on its obligations to comply with the law. As we have seen time and time again, these shortcuts do not pay. They do not pay for the entities who take them or for the multitude of victims that this misconduct leaves in its wake,” said Jorge G. Tenreiro, Acting Chief of the SEC’s Crypto Assets and Cyber Unit. “Our dedicated staff will continue to pursue investigations of those who may have violated the law, even after other wrongdoers have been identified.” I like the cut of your jib, Jorge.

Oh wait there’s more:

The SEC today also announced that the Prager Entities agreed to the entry of final judgments to settle separate, previous charges for violating auditor independence rules and for aiding and abetting their clients’ violations of federal securities laws. The SEC’s complaint alleged that, between approximately December 2017 and October 2020, the Prager Entities improperly included indemnification provisions in engagement letters for more than 200 audits, reviews, and exams and, as a result, were not independent from their clients, as required under the federal securities laws.

We wrote about that before: Prager Metis Just Got Thoroughly Boned By the SEC For Hundreds of Independence Violations

Alright, I’m done.