Investment Company Accounting Oversight Board

The implementation of an Investment Company Accounting Oversight Board is long overdue. There has been much talk about increased hedge fund regulation, accountability, and registration requirements to avoid hedge fund fraud. Rather than require mere registration of hedge funds a more significant solution to the problem would be the formation of the Investment Company Accountancy Oversight Board or ICAOB, similar to the Public Company Accounting Oversight Board or PCAOB.

In the years ahead there will likely be significant changes that affect Hedge Fund Formation and Hedge Fund Regulation. Through the implementation of an Investment Company Accounting Oversight Board or ICAOB similar to the PCAOB, the SEC which is already over burdened with broker-dealer and investment manager audits could focus more on regulatory issues rather than accounting issues. Accounting and financial auditing issues should be left to the experts in their respective fields.

The existence and implementation of an Investment Company Accounting Oversight Board would most likely have stopped Madoff years ago, if the Board's scope covers not just hedge funds, also known as investment companies, but anyone who directly or indirectly manages money.

This would also create a more efficient process for investors to select which hedge funds in which to invest. The PCAOB is a private sector, nonprofit corporation that was established by the Sarbanes-Oxley Act of 2002 to oversee auditors of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, fair and independent audit reports.

The PCAOB has broad investigative and disciplinary authority over registered public accounting firms. The PCAOB has the authority to establish by rule, fair procedures for the investigation and discipline of registered public accounting firms and associated persons of such firms. The Securities and Exchange Commission approved the rules adopted by the PCAOB.

Under the adopted rules, the PCAOB and its staff may conduct investigations concerning any acts or practices, or omissions to act, by registered public accounting firms that may violate any provision of the Act, the rules of the Board, the provisions of the securities laws relating to the preparation and issuance of audit reports. The Board's rules require registered public accounting firms to cooperate with Board investigations, including producing documents and providing testimony. The rules also permit the Board to seek information from other persons, including clients of registered firms. When violations are detected, the Board provides an opportunity for a hearing, and in appropriate cases, imposes sanctions, designed to deter a possible recurrence and to enhance the quality and reliability of future audits.

The Investment Company Accounting Oversight Board or ICAOB should be formed along the same guidelines as the PCAOB. Regulations should be enacted requiring all investment companies, investment advisers, money managers, hedge funds and anyone who manages money even indirectly, such as in the Madoff scandal, to have a yearly audit performed by an ICAOB auditing firm. This single requirement alone in my opinion would have prevented the Madoff scandal and most of the former and recent alleged frauds of Art Nadel, Samuel Israel III and Daniel Marino (Bayou), Nicholas Cosmo (Agape), and Martin Frankel.

Some news reports have stated that Madoff used Friehling & Horowitz as his auditor. Other news reports, however, indicate that Friehling & Horowitz was not an auditing firm at all and has been telling the American Institute of Certified Public Accountants (AICPA) for 15 years that it doesn't conduct audits.

If Friehling & Horowitz did tell the AICPA it did not conduct audits for Madoff and only acted as a glorified bookkeeper or accountant, then more blame would lie with those money managers, Fund of Funds and institutions that allocated money to Madoff for investment and did not examine the firm that supposedly conducting his audits.