Madoff Auditors Charged

May 18, 2009, Madoff Auditors Charged by the SEC with committing securities fraud by falsely representing that they had conducted legitimate audits, when in fact they had not.

The complaint filed in federal court in Manhattan alleges that from 1991 through 2008, David G. Friehling, CPA and his firm, Friehling & Horowitz, CPAs, P.C. (F&H), purported to audit financial statements and disclosures of Bernard L. Madoff Investment Securities LLC (BMIS).

The SEC's complaint alleges that Friehling enabled Madoff's Ponzi scheme by falsely stating, in annual audit reports, that F&H audited BMIS financial statements pursuant to Generally Accepted Auditing Standards (GAAS).

According to the SEC's complaint, Friehling knew that BMIS regularly distributed the annual audit reports to Madoff customers and that the reports were filed with the SEC and other regulators. The SEC's complaint further alleges that all of these statements were materially false because Friehling and F&H did not perform a meaningful audit of BMIS, and did not perform procedures to confirm that the securities BMIS purportedly held on behalf of its customers even existed.

According to the SEC's complaint, Friehling did not conduct any audit procedures with respect to BMIS internal controls, and had no basis to represent that BMIS had no material inadequacies. Afraid that his work for BMIS would be subject to peer review, as required of accountants who conduct audits, Friehling lied to the American Institute of Certified Public Accountants for years and denied that he conducted any audit work.

Madoff auditors charged with obtaining ill-gotten gains through compensation from Madoff and BMIS, and also from withdrawing returns from accounts held at BMIS in the name of Friehling and his family members.Madoff auditors charged with numerous securities violations, civil penalties and a court order requiring both Friehling and F&H to disgorge their ill-gotten gains.

Commentary

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 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.

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For the full SEC release go to Madoff Auditors Charged.