Francine McKenna is a lecturer in financial accounting at The Wharton School at the University of Pennsylvania. She currently produces a newsletter, The Dig, about public and pre-IPO companies.

The first red flag anyone receiving these reports should have seen is that there were two different audit firms producing them. The choice of firms itself is questionable. These are two small outfits, not even on the next tier to the Big Four global audit firms – Deloitte, Ernst &Young, KPMG and PricewaterhouseCoopers. Armanino and Prager Metis do audit a few public companies but none of the size or complexity of FTX. Because the firms are so small, the audit regulator, the Public Company Accounting Oversight Board (PCAOB), inspects them only once every three years.

The second red flag for any reader of the 2021 audit reports is that neither the Armanino nor the Prager Metis audit reports for 2021 provides an opinion on the FTX US or FTX Trading internal controls over accounting and financial reporting.

The third red flag is, despite a combination of enormous siphoning off of firm assets by related parties and favorable tax planning, neither FTX Trading nor FTX US paid any federal income taxes, although they both appeared to be profitable.

The biggest red flag for preparers and readers of the audited financial statements should have been the number of complex, roundtrip and utterly confounding related-party transactions documented in just these two years.